What Is a High-Ratio Mortgage?
If you have to borrow more than 80% of a home’s sale price to complete the purchase, you could find yourself in a high-ratio mortgage.
High-ratio mortgages result in higher loan amounts and additional costs, but they also allow for smaller down payments. That’s why they’re particularly common among younger borrowers.
As of September 2024, 45% of high-ratio mortgage holders originated their mortgages when they were under the age of 35, according to the Bank of Canada.
If a high-ratio mortgage is in your future, it’s important to know what might be in store for you.
High ratio mortgages vs. conventional mortgages
The term “high ratio” refers to the difference between the mortgage amount (the loan) and the purchase price (the value). This spread is more commonly known as the loan-to-value ratio, or LTV.
If the LTV is 80% or greater, meaning the down payment is 20% or less, the mortgage is high-ratio. On a $500,000 home purchase, for example, any down payment less than $100,000 would put you into a high-ratio mortgage.
Conversely, you’ll have a low-ratio or conventional mortgage if you use a down payment of 20% or more of the purchase price and the LTV falls below 80%.
» FIND OUT: How much mortgage can you afford?
Qualifying for a high-ratio mortgage
To qualify for a high-ratio mortgage, you’ll go through the same application process you would for a conventional mortgage. Your employment, income, debt and assets will all be evaluated to determine your creditworthiness.
But because high-ratio mortgages mean you’re financing a greater portion of a home’s price, they pose an inherently higher risk to lenders.
If you’re applying for a high-ratio mortgage, ensure your finances are as fit as can be. Paying down debt to shrink your total debt service ratio and lower your credit utilization ratio are two ways of convincing lenders to offer you a more competitive interest rate.
In most cases, high-ratio mortgages have a maximum amortization period of 25 years. First-time home buyers and people buying new builds can get an insured 30-year mortgage.
Mortgage default insurance
A high-ratio mortgage comes with an added cost: mortgage default insurance, which is a mandatory purchase when a down payment is less than 20%.
The cost of mortgage default insurance is based on a percentage of your loan amount, and varies depending on the mortgage’s LTV.
Here are some examples of the mortgage default premiums charged by CMHC:
For LTVs of up to 80%, the mortgage default insurance premium is 2.4% of the loan amount.
For LTVs of up to 85%, the premium is 2.8%.
For LTVs of up to 90%, the premium is 3.1%.
For LTVs of up to 95%, the premium is 4%.
If you’re buying a $400,000 home with a 5% down payment of $20,000, for example, the mortgage default insurance premium on your high-ratio loan would be $15,200. Upping your down payment to 10%, or $40,000, would reduce your premium to $11,160.
Mortgage default insurance is an important factor when determining mortgage affordability because your mortgage default premium is added to your loan amount before interest is calculated. It adds thousands of dollars to the principal and results in higher interest charges.
Another factor to consider is that you can only get mortgage insurance if you save for the down payment on your own or receive it as a gift from your family. You can’t borrow money for the down payment and still qualify for mortgage insurance — and you can’t get a high-ratio mortgage without insuring it.
High-ratio mortgage interest rates
Because high-ratio mortgages are insured against default, they pose less risk to lenders. That allows them to offer lower mortgage interest rates compared to conventional loans.
The difference between insured and uninsured mortgage rates is generally modest, with insured rates typically around 30-50 basis points lower than uninsured rates.
But those lower rates are only available because you’re paying the added cost of mortgage insurance. You’re also borrowing a larger sum of money, so you’ll be paying more in interest than you would if you were putting down 20% or more upfront.
» MORE: How does mortgage interest work?
Pros and cons of a high-ratio mortgage
Pros
- Purchasing a home with only a 5% down payment.
- Lenders may offer better interest rates to homeowners with high-ratio mortgages.
Cons
- You could pay up to 4% of your mortgage amount in mortgage loan insurance.
- You’ll pay more interest over the life of the loan.
- A maximum amortization period of 25 years, unless you’re a first-time home buyer or buying pre-construction.
Avoiding a high-ratio mortgage
If you’d like to find a way around the added costs associated with a high-ratio mortgage, you have a few options, like:
Saving a bigger down payment. A down payment of at least 20% means you’ll qualify for a conventional mortgage and escape paying for mortgage default insurance. If delaying your home purchase by a few months or adding a side hustle could help you save the extra cash, it might be worthwhile.
Buying a cheaper home. If your home’s purchase price is lower, the down payment you’ve saved will cover a greater percentage of the price. A less expensive home could help get your down payment over 20%.
Using the Home Buyers’ Plan. If you’re a first-time homebuyer, you can use up to $60,000 of your Registered Retirement Savings Plan (RRSP) to beef up your down payment as part of the Home Buyer’s Plan.
Frequently asked questions
What’s the difference between high-ratio and conventional mortgages?
What’s the difference between high-ratio and conventional mortgages?
A high-ratio mortgage involves a down payment of less than 20% of a home’s purchase price. A conventional mortgage uses a down payment of 20% or more. High-ratio mortgages require the purchase of mortgage default insurance; conventional mortgages do not.
Are mortgage rates higher for high-ratio mortgages?
Are mortgage rates higher for high-ratio mortgages?
Interest rates are actually lower for high-ratio mortgages than they are for conventional mortgages. High-ratio mortgages are insured, so lenders are protected against defaults. That lowers the risk associated with these large loans and allows lenders to offer lower mortgage rates.
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Clay Jarvis
