With rising housing prices and high interest rates, high-ratio mortgages can help potential homebuyers purchase a property without a significant downpayment. A high-ratio mortgage allows homebuyers to buy a home with a minimum of 5% down, making it an appealing option for those without substantial savings. 

This post will examine the costs of a high-ratio mortgage, how they work, and who qualifies. We’ll also compare alternative solutions to help you decide whether a high-ratio mortgage suits your homebuying needs.

Key Takeaways

• A high-ratio mortgage enables you to purchase a home with a smaller downpayment. 
• High-ratio mortgages require mortgage default insurance, which can raise the cost of borrowing. 
• Restrictions apply to high-ratio mortgages, including amortizations capped at 25 years and a purchase price of less than $1 million.

High-Ratio Mortgages Explained

An insured or high-ratio mortgage refers to a mortgage that requires a downpayment of less than 20%, has an amortization period of 25 years or less, and is for a property priced under $1,000,000. The only case where the amortization period can be extended to 30 years is if the property is a newly built home and the borrower is a first-time homebuyer. 

This mortgage solution requires mortgage default insurance, also called CMHC or high-ratio insurance, to safeguard the lender in case the borrower defaults. The borrower is responsible for covering the cost of this insurance, which may either be added to the total mortgage amount or paid upfront as a single lump sum.

In Canada, the minimum downpayment for a high-ratio mortgage is 5% on amounts up to $500,000 and 10% for any additional amount between $500,000 and $999,999.99. However, properties valued at $1,000,000 or higher will need a 20% downpayment and will not be eligible for mortgage default insurance. This means they are not required to have mortgage default insurance and are not considered high-ratio.

Loan-to-Value (LTV) Ratio

The loan-to-value (LTV) ratio is a deciding factor in determining whether your mortgage falls under the high-ratio category. This ratio compares the total loan amount after your downpayment against the property value or purchase price. If your LTV ratio is over 80%, your downpayment will be less than 20%, classifying your mortgage as high-ratio.

For example, if you purchase a home for $400,000 and put down the minimum downpayment of $20,000 (5%), your total mortgage amount would be $380,000 and your LTV ratio would be 95%. Since your LTV is over 80%, this is considered a high-ratio mortgage. 

If you were to increase your downpayment to $100,000 (25%), this would give you a total mortgage amount of $300,000 and your LTV ratio would be 75%. This mortgage would not be considered high-ratio since the LTV is 80% or lower.  

Comparing High-Ratio and Low-Ratio Mortgages

A high-ratio or insured mortgage refers to a mortgage where the borrower makes a downpayment of less than 20%, the amortization period is 25 years or less (unless the buyer is a first-time buyer purchasing a newly built home), and the purchase price is under $1 million. These types of mortgages require the borrower to pay for mortgage default insurance.

A low-ratio mortgage, also known as an insurable mortgage, requires a downpayment of 20% or more. Similar to high-ratio mortgages, low-ratio mortgages are applicable for properties with a purchase price of less than $1 million and an amortization period of 25 years or less.

Low-ratio mortgages also require default insurance. However, this can be covered by either the borrower or the lender. Depending on the lender, the borrower may be responsible for paying the insurance premium, while others may offer to cover it.

Comparing High-Ratio and Conventional Mortgages

Conventional or uninsured mortgages require a downpayment of 20% or more and can have a property purchase price exceeding $1,000,000 or an amortization over 25 years. These types of home loans are distinct from high-ratio and low-ratio mortgages as the lender has chosen not to acquire mortgage default insurance. This is because either the mortgage is established under a collateral charge registration or the property purchase price or amortization exceeds what is allowed for a high or low-ratio mortgage.

Comparison of Costs

The following table compares the costs of high-ratio, low-ratio, and conventional mortgages. To make a more accurate comparison, a 25-year amortization was selected, and the minimum downpayment for each mortgage was considered. The calculations were made assuming a 5-year fixed term and monthly payment schedule.

	High-Ratio (Insured)	Low-Ratio (Insurable)	Low-Ratio (Insurable)	Conventional (Uninsured)
Purchase Price	$400,000	$400,000	$400,000	$400,000
Amortization	25 years	25 years	25 years	25 years
Interest Rate	4.19%	4.39%	4.39%	4.74%
Minimum Downpayment	$20,000	$80,000	$80,000	$80,000
Mortgage Amount	$380,000	$320,000	$320,000	$320,000
Mortgage Default Insurance (CMHC)	$15,200	$7,680	$7,680	$0
Total Mortgage Amount	$395,200	$320,000 (Premium paid by lender)	$327,680 (Premium paid by borrower)	$320,000
Total Principal Paid (5-Year Term)	$50,033.27	$39,565.63	$40,515.20	$37,946.79
Total Interest Paid (5-Year Term)	$77,150.94	$65,530.22	$67,102.95	$70,896.66

How to Qualify for a High-Ratio Mortgage

Qualifying for a high-ratio mortgage is similar to qualifying for other types of mortgages. Lenders will evaluate your employment status, income, debt, and assets to determine whether you can comfortably handle mortgage payments and other financial obligations.

Paying off existing debts will decrease your current debt load and increase your chances of being eligible for a high-ratio mortgage. This will also positively impact your debt service ratios, increasing your chances of being approved for a mortgage. 

Maintaining a good credit score is also crucial, which can be achieved by making timely repayments and keeping credit utilization below 30% of your total credit limits. It is also essential to have all necessary documents that demonstrate your income and job stability readily available when applying for a mortgage.

Advantages and Disadvantages of a High-Ratio Mortgage

With any choice that may impact your finances, weighing the advantages and disadvantages of high-ratio mortgages is essential to ensuring you make the best choice when mortgage shopping.   

Advantages

High-ratio mortgages allow for a smaller downpayment, allowing individuals to enter the housing market earlier rather than waiting to save up enough for a 20% downpayment. Buying a home earlier can build equity, and you’ll benefit from property appreciation. Compared to uninsured and insurable mortgages, high-ratio mortgages usually have lower interest rates due to mortgage default insurance, which reduces the lender’s risk.

Disadvantages

Including mortgage default insurance in your principal can significantly increase your closing costs if paid upfront. If you add it to your mortgage, your balance will increase. This may result in a higher amount of interest paid over the life of your mortgage despite the lower interest rates offered. If you add default insurance to your mortgage, you must qualify with a higher income since you are stress-tested based on the total mortgage amount, which will be higher than if you were not adding the insurance.

Moreover, mortgages with a high loan-to-value ratio have maximum limits on the home’s purchase price and amortization, which could impact your home search. This can significantly limit your options for finding a suitable home, especially in a pricy location such as a major city where the average home price exceeds $1 million. Most lenders only permit mortgage refinancing once the loan-to-value ratio falls below 80% or below 65% if you intend to set up a HELOC.

Other Options to Consider

There are several other options that you can consider to avoid having to purchase default insurance for a high-ratio mortgage or to reduce the interest costs throughout the life of the mortgage. One option is to wait until you have a 20% or more downpayment saved. This allows you to choose an insurable or uninsured mortgage and avoid the need for default insurance premiums.

Adjusting your budget and buying a more affordable property could lower the downpayment required. This could enable you to meet the 20% downpayment criteria for insured and uninsured mortgages without waiting longer to save up more money.

Is a High-Ratio Mortgage Suitable for You?

When considering a high-ratio mortgage, affordability must be considered, taking into account the added costs of mortgage default insurance. Additionally, the property’s investment potential and future plans should be considered.

If you foresee needing to refinance or sell the property in the near future, there may be more budget-friendly options available besides a high-ratio mortgage. If you plan to own the property for a longer period of time, the appreciation of your property value may outweigh the initial costs of a high-ratio mortgage. 

If you anticipate that home prices will continue to rise, it may be beneficial to look at forecasts to see how much property prices are predicted to appreciate. This can help you determine if the additional costs of a high-ratio mortgage today will save you money compared to purchasing at future home prices.  Waiting until you have a larger downpayment saved in a few years could delay your home purchase even more as rising prices impact your affordability.

Frequently Asked Questions

Final Thoughts 

With the continuous rise in housing prices, opting for a high-ratio mortgage can allow you to purchase property earlier than waiting until you have 20% saved. However, it is important to remember that these mortgages come with additional expenses, such as default insurance premiums and increased interest expenses, which must be considered when adding them to your mortgage balance.

Our mortgage professionals can offer customized advice tailored to your individual requirements, whether you are considering a high-ratio mortgage or exploring alternative options. Contact us today to discuss your options and begin your journey toward owning your dream home.