Need a mortgage to buy that house of your dreams? According to Stats Canada, more than a third of Canadians have a mortgage. Generally, among mortgage holders, there are two types of loans available, a conventional mortgage and a high ratio mortgage.
High-ratio mortgages are required by those who borrow more than 80% of the value of a house. In other words, these mortgages involve down payments less than 20% of the purchase price.
High-ratio mortgages are the only way some Canadians can afford to buy a home. Knowing as much as possible about these types of loans — like their pros and cons and what you need to apply — is essential to ensure you make an informed decision about whether this financial product is right for you.
Key Takeaways
- High-ratio loans are when your down payment is less than 20% of the house’s cost.
- If you get a high-ratio mortgage, you’ll have to get home default insurance to protect the lender if you default.
- Because your lender is protected against non-payment, these types of mortgages may come with lower interest rates.
What Is A High Ratio Mortgage?
A high-ratio mortgage is when you provide a down payment of less than 20% of the home’s price, as mentioned. This means the mortgage loan amount will be more than 80% of the property’s value, making it somewhat risky for lenders. It’s called “high ratio” because the ratio of the loan amount versus the property’s value is higher than the 80% you get with a conventional mortgage.
When you get a high-ratio mortgage, lenders view you as a high-risk borrower. To make up for this risk, most lenders will require that you get mortgage loan insurance (also known as mortgage default insurance). This insurance is not designed to protect you if you default on your loan payments, but rather it protects your mortgage provider if you can’t make your payments.
It’s worth noting that in Canada you can’t get a high-ratio mortgage for a home valued at $1 million or more because it’s considered too risky. For homes in that price range, you must provide at least a 20% down payment. However, effective December 15, 2024, the home price cap will increase to $1.5 million, which means you can take out an insured mortgage with less than 20% down to buy a home under $1.5 million by December 2024.
Example Of A High Ratio Mortgage
Let’s say you want to buy a home selling for $800,000. If you make a down payment of $120,000 (only 15% of the purchase price), your mortgage amount would be $680,000. Since your down payment is less than 20%, it would be considered a high-ratio mortgage and you’d be required to get mortgage loan insurance.
What Is An LTV Ratio?
An LTV (loan-to-value) ratio is the amount you need to borrow versus the value of the house you want to buy. To figure out the LTV ratio, you need to divide the amount of your mortgage by how much the property costs. LTV Ratio = (price of home – down payment) / price of home
For example, if you want to buy a home valued at $800,000 but only have $120,000 to put down, you’ll have a mortgage amount of $680,000:
- LTV Ratio = Mortgage Amount / Property Value
- 0.85 or 85% = $680,000/ $800,000
An LTV ratio of 85% means you need to borrow 85% of the home’s value. Since this exceeds the 80% LTV for a conventional mortgage, it would be classified as a high-ratio mortgage.
Lenders generally prefer borrowers to have lower LTV ratios. Otherwise, they worry that you may be stretching yourself too thin financially and may be more likely to default on your loan.
High Ratio Mortgages And Mortgage Default Insurance
In general, if you can’t offer a down payment of at least 20% or more in Canada, your lender will require that you get mortgage default insurance. This is because lenders consider high-ratio mortgages riskier since you have less equity built up in the property and also may be more likely to default on your payments. To lessen this risk, mortgage default insurance is mandatory in Canada as it compensates the lender if you end up defaulting on your mortgage loan.
Premiums generally range from 0.6% to 4.5% of the total mortgage amount, depending on the down payment percentage. Home default mortgage providers in Canada include:
- Canada Mortgage and Housing Corporation (CMHC)
- Sagen
- Canada Guaranty Mortgage Insurance Company
Here is an example of premium fees charged by the CMHC:
| Loan-to-Value | Mortgage insurance cost |
| Up to and including 65% | 0.60% |
| Up to and including 75% | 1.70% |
| Up to and including 80% | 2.40% |
| Up to and including 85% | 2.80% |
| Up to and including 90% | 3.10% |
| Up to and including 95% | 4.00% |
Essentially, the size of your down payment significantly impacts your mortgage default insurance cost: the bigger your down payment, the lower your premium. However, there are other factors that also influence your insurance premium, such as your amortization period, property value, and employment situation.
The good news is that you don’t have to pay the entire insurance premium when you get your mortgage. Instead, the expense can be added to your overall mortgage balance and paid off over the maximum amortization period allowed for high-ratio mortgages. While this is convenient and saves you money upfront, interest will accrue on the premium amount, increasing your overall borrowing costs.
Benefits Of A High-Ratio Mortgage
- Low down payment. This lets people who don’t have enough savings for a 20% down payment become homeowners.
- Lower interest. While it may seem counterintuitive, lenders may offer lower interest rates on high-ratio insured mortgages compared to conventional mortgages because the mortgage default insurance protects them against the risk of default.
Drawbacks Of A High-Ratio Mortgage
- Mortgage default insurance. You have to buy mortgage insurance or most lenders won’t work with you.
- More costly. You have to cover mortgage default insurance premiums. This ranges from 0.6% to 4.5% of the mortgage amount and adds significant overall long-term costs (especially when you factor in that you have to pay interest on the insurance, not just the mortgage amount).
- Shorter amortization period. In Canada, high-ratio mortgages (a.k.a. insured mortgages) have a maximum amortization period of 30 years under certain conditions. In a recent announcement from the federal government, first-time home buyers or any buyers purchasing newly constructed homes will be able to qualify for insured 30-year mortgages effective December 15, 2024.
- Higher monthly payments. With higher LTVs, insurance premiums, and shorter amortization periods, high-ratio mortgages generally have higher mortgage payments than conventional mortgages.
How To Qualify For A High-Ratio Mortgage?
The process to qualify for a high-ratio mortgage is the same as that of a conventional mortgage application. Lenders will look at your employment status, income sources and assets, as well as your credit score to determine your creditworthiness and decide if you’re a good credit risk.
Another important consideration is your debt load. There are two main debt service ratios that lenders look at when approving you for a mortgage.
- Gross Debt Service (GDS) Ratio: This measures how much of your gross monthly income would go to paying housing costs like mortgage payments, property taxes, heating and more. For high-ratio-insured mortgages, the maximum GDS ratio is usually capped at 39%.
- Total Debt Service (TDS) Ratio: This looks at your overall debt burden by calculating how much of your gross monthly income covers all debt payments, including housing costs plus other debts like credit cards, car loans, etc. Most lenders require a maximum TDS of around 44%. This is why it’s important to get your debts under control before you apply for a mortgage to improve your chances of a successful application.
Keep in mind that, just as with a conventional mortgage, you’ll also have to pass the mortgage stress test. The stress test requires you to demonstrate that you can afford the mortgage payments at a higher qualifying rate, typically the greater of the contracted rate plus 2% or the Bank of Canada’s benchmark rate of 5.25%.
Conclusion
High-ratio mortgages may be the only way for some Canadians who might not have a large down payment saved up to ever own a home. While these types of mortgages often come with lower interest rates, there are downsides like higher overall costs. So be sure to carefully consider all the pros and cons to make an informed decision about whether a high ratio mortgage meets your needs.
