The High-Ratio Mortgage: What Is It?

By Arthur Favier

You’re probably reading this because you are curious about becoming a homeowner. Maybe you’re working, you have a dream of buying a home, but you’re stuck in a rut and can’t seem to get past the obstacles in your way. That’s okay, there are many different roads you can take to take to your goal of owning a home. If you struggle to save up for a down payment and you are just getting started on making a good income for yourself, then there is one road that will lead to homeownership. It’s called the high-ratio mortgage.

High-Ratio vs Low-Ratio Mortgage

A down payment on a house in Canada has to be at least 5% for a home selling for $500,000 or less. That percentage jumps to 10% for homes priced between $500,000 and $1 million. Homes over $1 million require a 20% down payment. 

Home purchases made with anything less than a 20% down payment are referred to as “high-ratio” mortgages. This means that the borrower has a high loan-to-value ratio (LTV). On the other hand, anything above 20% down is considered a low-ratio mortgage.

What is Loan To Value?

Let’s begin by talking about the loan-to-value ratio, which is not a complicated term at all. It simply tells us what percent of the home you are buying in relation to the total cost of the house. For example, if you bought a house for $500,000 and you had $25,000 cash saved up for your down payment, the loan-to-value ratio would be high, with 95% of the property mortgaged. The other 5% is down payment, which means you are putting in only a small percentage of the total cost.

On the other hand, a low LTV ratio would be buying a $500,000 house with $100,000 down. This means you are putting in 20% of the cost and getting a loan for 80%. 

Of course, the higher your down payment, the lower your monthly payments will be. But the LTV ratio also affects your mortgage insurance premium—the lender will ask for more money upfront to protect itself in case you can't pay back your loan. The higher the ratio, the greater the risk of default, and thus the higher premiums.

What is Mortgage Default Insurance?

To lenders, high-ratio mortgages are considered higher risk, since these borrowers are normally pushing their budgets and have less equity, meaning they are more likely to default on their loan. Mortgage default insurance protects the lender from the borrower not paying back their loan in the case of financial hardship. Lenders usually require mortgage default insurance when your down payment is less than 20% of the purchase price, and it's usually paid over the course of amortization.

Three institutions offer mortgage default insurance: Canada Mortgage and Housing Corporation (CMHC), and two private insurers, Sagen and Canada Guaranty. CMHC is the largest provider, which is why mortgage default insurance is sometimes referred to as CMHC insurance. During the mortgage qualification process, you can submit an application for mortgage default insurance.

The premium amount increases based on the borrower’s LTV ratio and is determined by the mortgage default insurance provider. For CMHC, the current insurance premiums are found here. While they can change over time, the larger your down payment is, the less you’ll need to pay for insurance premiums. 

How Much Will You Pay for a High-Ratio Mortgage?

Mortgage default insurance is not cheap. For example, a buyer who purchases a $400,000 home and makes a down payment of $20,000 or 5% down, would end up paying $15,200 in premiums over the course of the mortgage (4% of the mortgage amount). Placing 10% down or $40,000 would reduce premiums to 3.10%, totaling $11,160 for insurance.

This is why it’s recommended to save and make a 20% down payment ($80,000) to eliminate the additional costs of insurance premiums.

How to Save for a Down Payment to Avoid a High-Ratio Mortgage

There's a lot of fear out there when it comes to homeownership. From high interest rates to the possibility of losing it all, buying a house can be an intimidating move for many. But if you're thinking of buying a home, it's definitely something worth considering. The good news is that there are a number of things you can do today to protect yourself from getting stuck in a high-ratio mortgage in the future. The best thing to do is to start saving for a 20% down payment. 

Other important factors in buying a home are to determine the monthly payments you can afford and if  you have enough to put toward closing costs in Toronto. Some of that money will need to go toward closing costs, and some of it will need to go toward your mortgage. If you can't afford to put 20% down, you may not be in a position to buy the home of your dreams or be financially secure enough to hold on to it.

It seems like every time we think housing prices can't get any higher (especially in Toronto), they rise higher still. More people are buying and selling homes and buying and selling again. And while it's still possible to find an affordable home, it's getting harder and harder. Still, it's better to break into the property market as soon as possible than to sit on the sidelines.

Buying a home is an excellent way to start planning for the future, and it's never too late to begin. If you don't want to struggle to afford a mortgage later on, there are some ways you can start saving now. With a little planning and dedication, you can make sure your down payment is more than enough to buy a house in your area.

You can't save any money if you don't have any extra cash in the first place, and it's important not to live beyond your means. Skip that trip to the mall, put off that new car, and resist overspending. Put money away every month in your savings account. Make sure to come up with a budget, and stick to it.