Is It Better to Get a High Ratio Mortgage?

When you are planning to purchase your first home, you need to do a lot of calculations before purchasing to ensure that you maximise your affordability. Before the purchase of your new home, it is essential that you assess your household income, your long-term financial goals, your debt obligations and your monthly bills. One other important factor that you also need to consider is the amount of down payment you are going to make. This is where high ratio mortgages come in.

What is a high ratio mortgage?

A high ratio mortgage is when a borrower makes a down payment of less than 20% of the purchase price of a house. In simple terms, a borrower would receive a high ratio mortgage when their loan-to-value percentage is more than 80%. On the other hand, a conventional mortgage is a mortgage wherein the borrower pays over 20% on the down payment.

If you have funds for down payment that is less than 20% of the house value, you will have a high ratio mortgage and for this, you will also need an insurance, which can generally be bought by the lender through three Canadian default insurers. An important factor to note is that high ratio mortgages are perceived as a bigger risk for banks because there is less immediate equity in the home. Moreover, it become difficult for the bank to recover the loss in the event of a default, this resulted in the development of federal requirement of mortgage insurance to become the law.

Nevertheless, a high ratio mortgage can still be purchased with a down payment of as low as 5% of the purchase price because of the debt insurance. This is because majority of the homebuyers in the housing market prefer or are inclined towards having a mortgage insurance as compared to paying a larger down payment.

How does it work?

Essentially, you would have a high-ratio mortgage if you were purchasing a property and making a down payment of less than 20%. On the other hand, you would have a low-ratio mortgage when you are paying more than 20% of down payment for the house you are purchasing.

It is important to note that when you are getting a high ratio mortgage, it essentially means that you are borrowing more money which makes the mortgage riskier for lenders and certifying that having a debt insurance is necessary for all prime mortgage lenders when dealing with a high ratio mortgage.