In Canada, there are 2 types of mortgages – low-ratio or high-ratio.
What is the difference between low-ratio and high-ratio mortgages? Let’s take a closer look so you can consider your mortgage plan.
High-ratio mortgages
If you are interested in buying a house, you will need to have funds set-aside for your down payment.
Conventional mortgages require at least 20% of the purchase price for your down payment. If the property you are interested in is more expensive than you planned, or you don’t have the 20% cash for your down-payment, you may consider special-purpose financing such as high-ratio mortgages.
A high-ratio mortgage makes it possible for Canadians to buy a home with as little as 5% down payment based on the total cost.
The term high-ratio is used to describe the relationship between the purchase price and the loan amount. Experts refer to this as the loan-to-value ratio.
If you are buying a house worth $500,000, you can make a minimum down payment of $25,000 or higher, depending on your capacity. Your mortgage requirement will be $$475,000, depending on the amount of your down payment.
Your mortgage loan will be more than 80% of the purchase price for the house, thus, it is considered a high-ratio mortgage.
Conventional or Low-ratio mortgages
The opposite of a high-ratio mortgage is a low-ratio or conventional mortgage. This type of mortgage requires a minimum of 20% down payment based on the purchase price.
If you are planning to buy a house selling for $500,000, your down payment will be at least $100,000. You will require a mortgage loan of $400,000.
Of course, you can increase the amount of your down payment to decrease your required loan amount. Thus, you can save on interest over the life of the loan.
Canadian homebuyers are required at put down at least 5% on the first $500,000 and 10% for the excess amount. However, if the home you are buying is selling for $1,000,000 or more, you need to put down at least 20% down payment.
High-ratio mortgages are risky for the lender and the homebuyer because of the higher probability of defaulting on the mortgage loan. The homebuyer will also need to get mortgage insurance, thus increasing the cost of your home purchase.
Mortgage insurance is generally around 2 to 3.5% of the loan value and it protects the lender from default by the borrower.
For more information regarding mortgage insurance, refer to Canada Mortgage & Housing Corporation (CMHC) Quebec.