Mortgage Blog

What Is A High Mortgage Ratio? Mortgages Explained

January 30, 2024 | Posted by: Tuli Parubets

In simple terms, a high ratio mortgage is a loan where the amount borrowed is substantial in comparison to the property's value, typically exceeding 80% of the purchase price.

Are you planning to step into the world of homeownership, but the terms 'high ratio mortgage' and 'loan-to-value (LTV) ratio' have left you scratching your head? Understanding the intricacies of mortgage financing is crucial, especially when it comes to terms like high ratio and conventional mortgages. We know a high mortgage ratio is typically a loan exceeding 80% of the property's value. These mortgages play a pivotal role, especially for those unable to make a substantial down payment. In this article we delve into the realm of high ratio mortgages, explore an example, and give you 4 strategic tips for dealing with high ratio mortgages. Whether you're a first-time buyer navigating the real estate landscape or a seasoned homeowner looking to expand your knowledge, understanding high ratio mortgages is essential to making informed decisions in the housing market.

A happy family with a high mortgage ratio

Down Payments Explained

A down payment is the initial payment made by a buyer when purchasing a home or expensive asset. It's a percentage of the total purchase price and is paid upfront at the time of closing. The purpose is to show the buyer's commitment and reduce the lender's risk. A larger down payment can lead to better loan terms (35%). It's a crucial part of securing a mortgage, demonstrating the buyer's financial readiness and investment in the property.

Explaining High Ratio vs. Conventional Mortgages

Let's explore another example of a high ratio mortgage to shed light on how down payments and loan-to-value ratios influence the categorization of mortgages. Meet Emily and Daniel, a couple eager to purchase their first home in a thriving neighborhood in Vancouver. They've set their sights on a charming property with a purchase price of $500,000.

- Property purchase price: $500,000

Initially, Emily and Daniel have diligently saved $100,000 for their down payment, representing 20% of the property's value. This places them in the conventional ratio mortgage category, with an LTV of 80%.

Emily and Daniel’s down payment: $100,000

Emily and Daniel’s mortgage: $400,000

However, circumstances change, and they realize they need to allocate some of their savings for unforeseen moving expenses and home furnishings. Consequently, their available down payment is reduced to $80,000.

Emily and Daniel’s down payment (revised): $80,000

Emily and Daniel’s mortgage (revised): $420,000

Now, with the adjusted down payment, their LTV ratio increases to 84%, pushing them into the realm of high ratio mortgages. Faced with this shift, Emily and Daniel find themselves in a position where mortgage default insurance becomes a necessary safeguard, reflecting the higher risk perceived by lenders due to the increased loan-to-value ratio.

This example illustrates how changes in the down payment amount can affect the loan-to-value ratio, influencing the categorization of a mortgage as either high or conventional ratio. It underscores the importance of understanding these dynamics as prospective homebuyers navigate the complex landscape of real estate financing.

High Ratio Fees and Costs

When opting for a high ratio mortgage – one where your down payment is less than 20% of the property's purchase price – lenders often perceive you as a higher risk buyer, potentially more prone to defaulting on your mortgage obligations. To mitigate this risk, lenders require buyers in this category to obtain mortgage default insurance.

Mortgage Default Insurance Premiums

Mortgage default insurance serves as a safety net for lenders, providing coverage in the event you can no longer meet your mortgage payments. Unlike mortgage life insurance, which settles your mortgage in the event of your passing, default insurance is specifically tailored to protect the lender's financial interests. However, this safeguard comes at a cost, known as the insurance premium.

The premium is not a negligible expense; it can amount to thousands of dollars. The payment structure is designed to accommodate the financial circumstances of the homebuyer. Instead of requiring an upfront payment, the premium is typically added to your mortgage amount, spreading the cost over the life of the loan. It's important to note that the premium's magnitude is directly influenced by your down payment amount and, correspondingly, your loan-to-value ratio (LTV). As a general rule of thumb, the higher your LTV, the steeper the premium.

In Canada, mortgage insurance is available through three main providers: Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty Mortgage Insurance Company. Understanding these insurance dynamics and associated costs is vital for anyone considering a high ratio mortgage, providing clarity on the financial implications and alconventionaling for informed decision-making in the complex landscape of real estate financing.

Amortization Periods

An amortization period is the total time given to fully repay your mortgage. With a conventional ratio mortgage and no mortgage default insurance, the maximum period is 30 years (some specialty lenders offer up to 40 years). But with an insured mortgage, it reduces to 25 years. This means higher monthly payments and a tighter timeframe, demanding careful monthly budgeting.

4 Strategic Tips to Avoiding High Ratio Mortgages

After understanding the implications of a high ratio mortgage, your next steps can involve strategic financial planning:

Increase Your Down Payment: Explore ways to boost your down payment, such as adjusting your budget to save more. Additionally, consider the option of utilizing your Registered Retirement Savings Plan (RRSP) as a down payment if you qualify and are a first-time buyer.

Consider Delaying Your Purchase: If saving more is challenging, you might contemplate postponing your home purchase until you can accumulate a larger down payment. This approach can reduce the need for a high ratio mortgage.

Explore Less Expensive Properties: If increasing your down payment significantly is not feasible, consider looking for more affordable properties. Choosing a home within a lower price range can help you avoid the need for a high ratio mortgage.

Take Advantage of First-Time Homebuyer Grants and Incentives: Investigate and make use of any first-time homebuyer grants or incentives available to you. These programs can provide financial assistance, making it more feasible for you to enter the housing market while minimizing the impact of a high ratio mortgage. Check out our page on mortgages for first time home buyers for more info!

By carefully considering these options and tailoring them to your financial situation, you can navigate the homebuying process with a focus on minimizing the risks associated with high ratio mortgages and maximizing the benefits available to you.

Want expert advice? Get in touch today!

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