This piece was originally published on June 8, 2020, and was updated on October 17, 2022.
In Canada, mortgages can be either high-ratio or low-ratio, and the difference matters. Having a high-ratio mortgage can make a significant impact on the overall amount of interest you’ll pay, and can cost you tens of thousands of dollars extra over the life of your mortgage. This article has everything you need to know about high-ratio mortgages in Canada.
What is a high-ratio mortgage?
A high-ratio mortgage is one with a down payment of less than 20% of the purchase price of the home you’re buying. The ‘high-ratio’ part of the name refers to the ratio between the mortgage amount (the loan) and the total purchase price (the value), also known as the loan-to-value ratio. The opposite of a high-ratio mortgage is a low-ratio mortgage, which has a down payment of more than 20% of the property purchase price. By increasing your down payment the ‘loan’ portion of the ratio will decrease, thus decreasing your loan-to-value ratio.
The best way to understand the difference between high-ratio and low-ratio mortgages is with a couple of examples.
High-ratio mortgage example
Let’s say you’re buying a $500,000 home. With a down payment of 10%, here are the numbers that matter:
- Property Price (value): $500,000
- Down payment: $50,000
- Mortgage amount (loan): $450,000
In this example, your loan to value ratio is 9 to 10 (90%) which is considered a high-ratio mortgage.
Low-ratio mortgage example
Let’s take the same example, but with a larger down payment of 25%.
- Property Price (value): $500,000
- Down payment: $125,000
- Mortgage amount (loan): $375,000
Our new loan-to-value ratio is 3 to 4 (75%) which is considered a low-ratio mortgage.
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Implications of a high-ratio mortgage
The most important upshot of having a high-ratio mortgage is that you’ll need to pay for mortgage default insurance, also known as CMHC insurance. This is a federal requirement to ensure that higher-risk mortgages are properly insured. Here are the main implications of having an insured mortgage.
Cost of premiums: While the mortgage default insurance policy is taken out by your lender, you’ll be required to pay the premiums upfront, at the beginning of your mortgage. The cost of premiums will be added to your overall mortgage amount, and are generally between 2% and 4% of the mortgage amount. The actual rate depends on your loan-to-value ratio, with higher ratios attracting a higher premium. For a mortgage amount of $500,000, your CMHC premiums could be anywhere between $10,000 and $20,000. You can use our mortgage payment calculator to estimate the cost of CMHC insurance on a particular mortgage.
Amortization period: For an insured mortgage, your maximum amortization period will be 25 years. Non-insured mortgages can have amortization periods of up to 35 years. The amortization period is the total amount of time you have to pay off your mortgage. A shorter amortization period will result in you paying a higher regular mortgage payment, which may be harder to budget for. You can use our amortization calculator to get a sense of what your monthly mortgage payments under different amortization period length scenarios would be.
Interest rate: There’s a difference between the mortgage rates of insured vs. uninsured mortgages. Insured mortgages are inherently less risky because your lender would receive a payout if you were to default. That means your lender can afford to offer a lower interest rate on insured mortgages. However, the cost of CMHC insurance would almost always be more than the savings you could make from a slightly lower interest rate.
Tips for getting a high-ratio mortgage
If you find yourself in the position of considering a high-ratio mortgage, here are a few tips to consider.
- Save a bigger down payment: Waiting to get a mortgage later gives you more time to save for your down payment, which could bring you over the 20% threshold for CMHC insurance. This would see you avoid paying CMHC premiums together.
- Buy a cheaper home: By purchasing a cheaper property, your down payment will represent a larger percentage of the overall price, which could bring you over the 20% threshold.
- Increase your down payment: If you have to buy now and you can’t buy a cheaper home, try to increase your down payment with a loan or gift from a family member, or by participating in the RRSP home buyers plan, if you’re eligible.
- Compare mortgages rates: Just because you take out a high-ratio mortgage, it doesn’t mean you won’t be able to get a great mortgage rate. Comparing rates from multiple lenders is one of the best ways to save money on your mortgage. You can receive personalized quotes from multiple providers for free in just minutes with Ratehub.ca – get started here.
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The bottom line
High-ratio mortgages are not uncommon in Canada, and you shouldn’t worry too much if you end up taking one out. You have a long time to pay it off, after all. The whole point of high-ratio mortgages is to allow people with fewer assets to get a start on the property ladder.
However, avoiding a high-ratio mortgage in the first place is the best way to save money, and can make buying a home in Canada more manageable. Learning as much as you can about mortgages, comparing rates, and speaking to a mortgage broker are all steps worth taking.