High Ratio Mortgage
High Ratio Mortgage
In Canada, mortgages can be either high-ratio or low-ratio, and the difference matters. Having a high-ratio mortgage can make a significant impact on the overall amount of interest you’ll pay, and can cost you tens of thousands of dollars extra over the life of your mortgage. This article has everything you need to know about high-ratio mortgages in Canada.
What is a high-ratio mortgage?
A high-ratio mortgage is one with a down payment of less than 20% of the purchase price of the home you’re buying. The ‘high-ratio’ part of the name refers to the ratio between the mortgage amount (the loan) and the total purchase price (the value), also known as the loan-to-value ratio. The opposite of a high-ratio mortgage is a low-ratio mortgage, which has a down payment of more than 20% of the property purchase price. By increasing your down payment the ‘loan’ portion of the ratio will decrease, thus decreasing your loan-to-value ratio.
The best way to understand the difference between high-ratio and low-ratio mortgages is with a couple of examples.
Implications of a high-ratio mortgage
The most important upshot of having a high-ratio mortgage is that you’ll need to pay for mortgage default insurance, also known as CMHC insurance. This is a federal requirement to ensure that higher-risk mortgages are properly insured. Here are the main implications of having an insured mortgage.
Cost of premiums: While the mortgage default insurance policy is taken out by your lender, you’ll be required to pay the premiums upfront, at the beginning of your mortgage. The cost of premiums will be added to your overall mortgage amount, and are generally between 2% and 4% of the mortgage amount. The actual rate depends on your loan-to-value ratio, with higher ratios attracting a higher premium.
How much does it cost?
The following table provides you with a general idea of the premiums charged by CMHC. The exact premium will be calculated when you apply for a mortgage and provincial sales tax may apply.
Premium on Total Loan**
Standard Purchase Premium
|Up to and including 65%||0.60%|
|Up to and including 75%||1.70%|
|Up to and including 80%||2.40%|
|Up to and including 85%||2.80%|
|Up to and including 90%||3.10%|
|Up to and including 95% Traditional Down Payment|
Non-Traditional Down Payment