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Your questions about high ratio mortgages, answered.
What is a high ratio mortgage?
In Canada, a high ratio mortgage is a mortgage secured with a down payment of less than 20% of the selling price of the home. Your down payment is a portion of the total value of the home, which means that by increasing your down payment, you lower your loan-to-value ratio (i.e., the gap between what you put down and the outstanding value of the home). By decreasing your down payment, you increase your loan-to-value ratio.
Conventional vs. High Ratio mortgage: What’s the difference?
When purchasing a home in Canada, homebuyers are required to provide a portion of the full value of the home up front, known as a down payment. Conventional, or low-ratio, mortgages are secured with at least 20% down on the value of the home. In addition, there are a number of implications of a high-ratio mortgage as opposed to a low-ratio or conventional mortgage.
High-ratio mortgage fee: A one time fee of between 0.05% and 3.25% of your mortgage is added to high ratio mortgage contracts. This is either added to your mortgage payments or you can pay it on closing.
Mortgage insurance: There are a number of fees high ratio mortgage applicants should think about compared to a conventional mortgage. For instance, while your lender will take out a CMHC insurance policy for high-ratio borrowers, premiums will need to be paid up front. Premiums usually range from 2% to 4%. . The higher your loan-to-value ratio is, the higher your rate will be.
Amortization: On a high ratio mortgage, the maximum amortization period is 25 years, whereas low-ratio mortgages can opt to amortize their loans over as long as 35 years. The amortization period refers to the amount of time it will take you to pay off the outstanding loan balance.
Interest rates: A high ratio mortgage may actually come with lower interest rates than a conventional mortgage loan. This is because, should you default, your Canada Mortgage Housing Corporation (CMHC) insurance would cover paying out the lender, making the loan less risky for the lender. The slightly lower interest rate usually won’t cover the cost of CMHC insurance, though.
Do I need mortgage insurance with a high ratio mortgage?
Yes. All homeowners in Canada with a high ratio mortgage require mortgage insurance. It is commonly referred to as CMHC insurance since it’s offered by the Canadian Mortgage and Housing Corporation. The rate you receive on your mortgage insurance will also depend on the loan-to-value ratio of your mortgage. The chart below indicates how much you’ll pay in mortgage insurance on a $500,000 home depending on the size of your down payment.
|Home value||Down payment||Amortization period||Mortgage insurance|
|$500,000||5% or $25,000||25 years||$19,000|
|$500,000||10% or $50,000||25 years||$13,950|
|$500,000||15% or $75,000||25 years||$11,900|
|$500,000||20% or $100,000||25 years||$0|
How do I qualify for mortgage default insurance?
While a high-ratio mortgage must have CMHC insurance, or mortgage default insurance, there are some requirements you’ll have to meet.
- Firstly, you’ll need to ensure that your amortization period is 25 years or shorter.
- Secondly, if the purchase price is between $500,000 and $999,000, a higher down payment is required: 5% for the first $500,000 and 10% of the remaining balance.
- Lastly, homes worth more than $1,000,000 are not eligible for mortgage default insurance. This means that a high-ratio mortgage cannot be secured on these homes, which must be purchased with a down payment of at least 20%.
What is the minimum down payment on a mortgage in Canada?
The minimum down payment on a high-ratio mortgage is 5% of the value of the home, depending on the value of the property. Homes worth up to $500,000 require a down payment of at least 5%, while homes worth between $500,000 and $999,999 require a down payment of 5% on the first $500,000 and 10% of the rest. Homes worth more than $1,000,000 are not eligible for mortgage insurance. If you’re putting down the minimum amount on a home, you’re entering a high-ratio mortgage by default. For conventional mortgages, the minimum down payment in Canada is 20%.
How can I get a cheap rate on a high-ratio mortgage?
Like with any kind of loan, there’s no surefire way to get a cheap mortgage rate. While it’s true that high-ratio mortgages often come with slightly lower interest rates because they’re insured, this doesn’t mean it’s easy to find a great rate.
There are a number of factors lenders will take into account when considering your mortgage application, such as your credit score, your debt ratios, and your income. We recommend focusing on these factors to improve your chances of getting a great rate.
Improve your credit score: The minimum credit score to qualify for a high-ratio mortgage is 680 in Canada. In general, your lender will look at your credit score when determining your rate, as your score is usually indicative of your ability to make payments on time and manage your debts. The best way to improve your score is to make loan and credit payments on time and in full.
Improve your debt ratios: Lenders will also determine whether you have a reliable stream of income and whether that income is high enough to qualify for your new mortgage loan. In addition, lenders will also look at your Gross Debt Services (GDS) and Total Debt Services (TDS) ratios to determine whether you can handle your payments. As per the guidelines from the Canadian Mortgage and Housing Corporation (CMHC), your GDS ratio should not exceed 39% of your gross annual income. Furthermore, your TDS ratio should not exceed 42%.
Compare the market: Lastly, the best thing you can do to ensure you’re getting a competitive rate is to compare the market. Price comparison websites are becoming an increasingly popular way for homebuyers to hunt for great rates. LowestRates.ca compares mortgage rates from 75+ of the top banks and brokers in Canada. All you have to do is fill out the form above.
Can I calculate my high ratio mortgage payments?
Yes. With the LowestRates.ca Mortgage Payment Calculator, you can see exactly how much you’ll be required to pay in mortgage payments depending on how much you put down. This calculation will also include mortgage insurance.
Can a mortgage refinance or a second mortgage also be high ratio?
First, let’s review what a second mortgage and mortgage refinance are. A mortgage refinance refers to a number of different ways to access equity from your home. This can come in the form of a second mortgage, such as a HELOC or home equity loan, or from breaking your mortgage altogether and beginning a new one.
it is possible for a second mortgage and mortgage refinance to be high ratio. This is because in both cases, homeowners are generally expected to own at least 20% of their homes before they’re eligible for these services. If a lender chooses to refinance your mortgage or allows you to take out a second mortgage without meeting this criteria, your new mortgage will be considered high-ratio and will also require mortgage insurance.
Will your high ratio mortgage rate depend on where you live?
High ratio mortgage rates in Ontario won’t vary significantly compared to high ratio mortgages in Alberta or B.C. High-ratio mortgage rates for the most common mortgage contract among Canadians, the five-year fixed mortgage, are driven by five-year government bond yields.
This is why the discrepancies you see in rates from one province to the next won’t be huge. However, you might see slight variances in the rates because rates are set differently from one lender to another and they may factor in how much competition lenders have to contend with. In regions where the majority of the population gets their mortgages from the same lender, this lender has less competition and therefore has the ability to set their rates a bit higher.
This offer condition can save you a lot of headaches on existing homes and even new builds.