One of the most important decisions you’ll need to make when purchasing a home is determining how much of a down payment you can afford to put towards your mortgage. In Canada, homes under $500,000 require a minimum of 5% down. More expensive homes have different rules, which you can check out here. Regardless of these minimums, any mortgage where the downpayment is less than 20% is considered a high ratio mortgage.
How High Ratio Mortgages Work
The term “high ratio” refers to any mortgage where the loan to value ratio is more than 80%. For example, imagine you applied for a mortgage on a $250,000 home and paid $30,000 down. You paid 12% of the purchase price and the bank would loan you the remaining 88%. This would be considered a high ratio mortgage. In these cases, the risk to lenders is relatively high. Because of this, Canadian mortgage rules dictate that homeowners must purchase mortgage default insurance.
Mandatory Mortgage Insurance
Mortgage insurance protects the financial interest of the lender in case the borrower defaults on their payments. This insurance is offered by the Canada Mortgage and Housing Corporation (CMHC), and two private insurers: Genworth and Canada Guaranty. The application for insurance is submitted at the same time that you apply for your mortgage. Premiums can change over time and are typically based on the loan to value ratio. In sum, the less you put down, the more you will pay in insurance premiums.
Making the Right Choice
While it may seem counterintuitive, homebuyers with high ratio mortgages tend to get access to lower rates than those who put 20% or more on their mortgage. This is because their mortgages are insured. If a high ratio homeowner defaults, the lender is covered. If a low ratio homeowner defaults, the lender will be out that money. In this way, some homeowners could actually save money in the long run. This decision, of course, will need to take into account the interest over the course of the mortgage, as well as the cost of insurance premiums.
High ratio mortgages make homeownership accessible to more Canadians than ever. Our team at Source Mortgage can help you determine if a high ratio mortgage is right for you. Contact us today to get started!