With the Canadian housing market seemingly getting rockier by day, opting for a high-ratio mortgage may seem like the only option for many people.
But what is a high-ratio mortgage? And are there hidden cons (or pros) associated with getting one?
Here’s everything you need to know so you can decide whether to take the plunge or continue saving up.
What is a high-ratio mortgage?
A high-ratio mortgage is a loan that covers more than 80% of the home’s purchase price.
For example, if you were able to somehow find a $100,000 home (lucky you!), but could only put down $15,000 towards the purchase price, you’d have to take out a loan to cover the remaining $85,000. That would be considered a high-ratio mortgage.
If your mortgage is considered high ratio, you’ll be required to pay for mortgage insurance on top of your loan payments.
Calculating your loan-to-value ratio (LTV)
How can you calculate whether you have a high-ratio mortgage or not?
While it seems fairly simple in a round-number example like above, it can get more complicated when talking about the real cost of homes (all considered).
Luckily, there’s a fairly simple formula to figure out what’s called your loan-to-value ratio:
(Home price – Down payment) / Home price = LTV
Using this formula, the threshold for a high-ratio mortgage is 80%.
So say the final cost of your home is $543,300 and the max down payment you can afford is $30,000. Here’s what that calculation looks like:
($543,300 – $30,000) / $543,300 = 94%
In this case, you have a very high-ratio mortgage. In order to spring for a conventional mortgage, you’d have to put down at least $108,660 (in other words, 20%).
Pros of a high-ratio mortgage
Now that you know whether or not your mortgage is considered to be high ratio, you’ll have to decide if it’s worth pursuing or not. What are the upsides and downsides to it?
Broadly speaking, here are some things that make a high-ratio mortgage worthwhile:
- Broadens your horizons: Being able to put down a smaller down payment can mean a lot more homes are within your reach.
- Helps you get into the homeowner game sooner: On top of opening the doors to more homes, a high-ratio mortgage may also help if you weren’t able to afford the down payments on even the cheapest homes you could find at your current stage in life.
- Lower interest rates: Because you’ll need to pay mortgage insurance, you actually become less of a risk to banks – which means they’ll often offer you slightly lower interest rates.
Cons of a high-ratio mortgage
But there are some downsides to consider about high-ratio mortgages as well – and most of them have to do with stricter rules and more money.
- More expensive over the long run: You’re required to get mortgage insurance with a high-ratio mortgage, which means you’ll have to pay up to 4% of your total loan in insurance premiums. This could take away any advantage you gained with the lower interest rates.
- Mortgage insurance means stricter rules: Insured mortgages can have a maximum amortization period of 25 years, whereas uninsured equivalents can go up to 35 years. If you were hoping to spread out your payments a little more, you’ll have a hard limit with a high-ratio mortgage.
How much more does a high-ratio mortgage cost?
The most important take away about a high-ratio mortgage is that you’ll need to pay mortgage insurance, which should be factored into the overall cost of your home.
Okay cool, so how much will this cost you?
As always, it depends on who you go with. You can either go with the most popular option (CMHC insurance) or with a private lender (either Genworth or Canada Guaranty).
Since CMHC is the most popular, we’ll go over the costs of going with them. You can see their rates here, but here’s the most important info to know:
| LTV ratio and down payment % | Premium on total cost of loan | Example of cost on a $500,000 home |
|---|---|---|
| * 80.01% – 85% LTV * 15% – 19.99% down payment | 2.8% | $14,000 |
| * 85.01% – 90% LTV * 10% – 14.99% down payment | 3.1% | $15,550 |
| * 90.01% – 95% LTV * 5% – 9.99% down payment | 4% | $20,000 |
The total cost of getting a high-ratio mortgage depends on how much of a down payment you can afford. You can choose to either pay this cost as a lump sum upfront or get the total rolled in to your mortgage (which is the most common choice).
So not only will the size of your down payment impact the total cost of your mortgage loan (causing you to pay more in interest), but the premium also goes up the lower your down payment is.
High-ratio mortgage alternatives
If you don’t like the cost of a high-ratio mortgage, what are your other alternatives?
Well, there’s really only one other type of mortgage. Here’s how the 2 options compare.
High-ratio vs. low-ratio mortgage (AKA conventional mortgage)
Where a high-ratio mortgage is one where you pay less than 20% of the total purchase price as a down payment, it follows that a low-ratio mortgage is when you pay 20% or more. This is also referred to as a conventional mortgage.
Here’s an overview comparison of the 2 options:
| Type of mortgage | High-ratio mortgage | Low-ratio mortgage |
|---|---|---|
| Down payment | Less than 20% | 20% or more |
| Mortgage insurance required? | Yes | No |
| Max. amortization period | 25 years | 35 years |
| Perks | * Lower interest rates * Lower bar for entry | * Cheaper overall * More flexibility |
If you’re able to get a low-ratio mortgage, you’ll be able to save money by not getting mortgage default insurance and have a bit more freedom when it comes to how long you want to pay off your mortgage. The major downside is you’ll need to put more money upfront as a down payment.
But what if you can’t afford a low-ratio mortgage yet? Here are a few things you can do to work towards it:
- Remember to take advantage of the First-Time Home Buyer’s Plan: This will allow you to use your RRSP savings towards the down payment of a home without facing tax penalties.
- Opt for a cheaper home: Whether it’s a fixer-upper or just in a cheaper area, a 20% down payment will be easier to get on a house with a lower purchase price.
- Set up a savings plan: If you have a goal in mind, make your savings more concrete by setting realistic monthly contribution goals. Using the right savings account can also help you accrue interest while keeping the funds accessible.
If any of these methods work for you, it’s generally suggested that you opt for a low-ratio mortgage whenever possible.
Is a high-ratio mortgage in your future?
Now that you’re more familiar with what a high-ratio mortgage actually is (and how to calculate if you’re looking at one), will you be opting for one with your next house?
Have you had a high-ratio mortgage before? How did you find that process? Do you regret it?
Let us know in the comments below!
FAQ
What is a high-ratio mortgage?
A high-ratio mortgage is a loan that covers more than 80% of the total purchase price of a home. In other words, it means you put up less than 20% for the down payment and will now need to pay for mortgage default insurance.
What’s the difference between a high-ratio vs. low-ratio mortgage?
The difference between the 2 types of mortgages lies in what kind of down payment you make on the home. If it’s less than 20%, then you have a high-ratio mortgage and will need to pay mortgage insurance. If it’s 20% or more, you’ll have a bit more flexibility when it comes to insurance and amortization length.
Do I need high-ratio mortgage insurance in Canada?
If you can’t afford at least a 20% down payment on the homes you’re looking at, then you’ll likely have to opt for a high-ratio mortgage. Though this may be a bit more expensive in the long run, it could give you more flexibility at the beginning of your homeownership.
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