High-ratio mortgage

High-ratio mortgage is one of the mortgage loan option that requires from the borrower to place down the payment of less than 20% of the property's price. In other words, high-ratio mortgage is a loan to value ratio of more than 80%. The exception here is applied when the borrower is self-employed - in such a case he/she needs to pay beforehand less than 35%. High-ratio mortgage is widely known in Canada. To compare, the opposite option to the high-ratio mortgage is called conventional or low ratio mortgage - this is the situation, when the borrower needs to put down the payment of more than 20% (35%- in case of self employed) of the initial value.

A high-ratio mortgage insurance

Most high-ratio mortgage are required by law to have mortgage default insurance, which is provided by either CMHC, Canada Guaranty or Genworth. The borrower needs to pay a premium for this insurance. The insurance premium for a high ratio mortgage is determined by the down payment amount (less than 20% and 35%). For high ratio mortgages, the default mortgage insurance premium is added on top of the initial amount, and the payment is one with the mortgage payment. The purpose of such insurance is to protect the lender in case the borrower is not able to make the payments.

The main benefit of mortgage loan insurance is the stabilization of the housing market. During economic slumps when down payments may be harder to save, it ensures the availability of mortgage funding.

The cost of such insurance is calculated as the percentage of the mortgage, based on the size of the down payment. Firstly, the lender pays an insurance premium on mortgage loan insurance. After which the lender will likely pass this cost on to the borrower. There are two ways to pay off this obligation:

• pay it in a lump sum
• add it to the mortgage (include in the further payments).

Differences between conventional and high ratio mortgage

Conventional (low-ratio mortgage) mortgage is the type of the loan where the down payment is equal to 20% or more of the property's value/purchase price. A low-ratio mortgage does not normally require mortgage protection insurance. As an alternative, a high ratio mortgage is useful for those who have less than a 20% down payment. High ratio mortgage allows to buy a home with less than 20% of the purchase price as down payment. However the special insurance needs to be included as the factor protecting against default.

Advantages and disadvantages of high ratio mortgage

The benefit of such loan option is the fact that the borrower is able to purchase the property with as little as 5% to 19.99% down payment. It is the excellent opportunity for first-time home buyers to allow them to own a home assuming they have good credit and steady income (without a big down payment).

When it comes to the disadvantages of the high ratio mortgage, one of the main here is the fact that borrower will incur the additional insurance cost. What is more, the borrower will need to pay the insurance premium amount, as part of their closing costs.

Examples of High-ratio mortgage

• The most common example of a high-ratio mortgage is when the borrower puts down less than 20% of the initial value of the property. In such a case, the lender provides the borrower with a mortgage loan that exceeds 80% of the initial value of the property.
• Another example of a high-ratio mortgage is when the borrower is self-employed and needs to place down the payment of less than 35% of the property’s value. In this case, the lender provides the borrower with a mortgage loan that exceeds 65% of the initial value of the property.
• A third example of a high-ratio mortgage is when the borrower is a first-time buyer and is eligible for a special program or incentive from the government. In such cases, the borrower may be able to get a mortgage loan with a loan-to-value ratio of more than 80%.

Other approaches related to High-ratio mortgage

Here are some other approaches related to high-ratio mortgage:

• Mortgage Insurance: This type of insurance protects the lender in the event that the borrower defaults on the loan. It is usually required for high-ratio mortgages.
• Prepayment Privileges: Prepayment privileges allow the borrower to make extra payments on the loan which can reduce the amount of interest paid over the life of the loan. This can be beneficial to borrowers who are able to pay off their loan faster.
• Portability: Portability allows the borrower to take their mortgage with them if they decide to move. This can be beneficial if interest rates are higher in the new location.
• Variable-rate Mortgages: Variable rate mortgages allow the borrower to take advantage of changing interest rates. The interest rate can change over the life of the loan, which can make it more affordable.

In summary, high-ratio mortgages are a loan to value ratio of more than 80%, which usually require mortgage insurance, but can offer benefits such as prepayment privileges, portability, and variable rates.

Footnotes

High-ratio mortgage — recommended articles

Short rate cancellation — Automatic Premium Loan — Adjustable Life Insurance — Waiver of premium rider — Guaranteed renewable — Money-purchase pension plan — Reversionary bonus — Initial deposit — Disposition fee

References

• Charupat N, Huang H (2012).Strategic Financial Planning Over the Lifecycle: A Conceptual Approach to Personal Risk Management, Cambridge University Press, New York
• Gray D, Mitham P (2010).The Canadian Landlord's Guide: Expert Advice for the Profitable Real Estate Investor, John Wiley&Sons, Mississauga
• Ioannou T, Ball H (2010).Buying and Selling a Home For Canadians For Dummies, John Wiley&Sons, Mississauga
• MiniCram (2019).MiniCram OREA Exam Mortgage Financing: Principles of Mortgage Financing, MiniCram, Ontario

Author: Weronika Włodarska