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What Is a High Ratio Mortgage, And How To Use It

couple getting a high ratio mortgage

What is a high ratio mortgage, and what do you need to know about it? 

Is a high mortgage ratio worth getting into, or is it best to stick to other mortgage options? Should I have a longer or a shorter amortization period…?

While all this can sound like complicated money-talk, it’s actually quite straightforward to understand, regardless of your experience in buying homes or applying for mortgages. 

In this article, we’ll talk about high ratio mortgages and their implications, while also breaking down this seemingly inaccessible mortgage jargon.

 

What Mortgage Is Right For You?

In regards to its residential market, Canada retains its long-established reputation of being a considerably amicable country. A place where possibilities can and will be found in order to accommodate everyone, no matter their financial possibilities. Granted, some conditions will be held in place to ensure everything is equitable for all parties involved. 

This is why, when looking to buy a house in Canada, you’ll find a plethora of financial arrangements that can cover a wide array of needs a large variety of lenders to work with, a multitude of mortgage loan options, and different ways to adjust the down payment needed to start off with. 

For example, maybe you are a borrower who is unable to put down a large down payment. In this scenario, a high ratio mortgage will allow you to still get the home of your dreams with a down payment of as little as 5%.

 

Implications Of High Ratio Mortgages

To better understand what a high ratio mortgage can do for you, you should first have a clear idea of what regular mortgages can support you with. 

Regardless of the different lenders you go to, you’ll find that a conventional mortgage will offer you up to 80% of the total cost of the property you’re looking to purchase. While this can definitely be a high amount, in some cases, it simply won’t be enough — making many homebuyers want to turn to different solutions. 

When advance money is a problem, a high ratio mortgage can seem like a good solution, allowing for smaller down payments. But what exactly is one getting into when applying for it?

 

What Does It Mean When Your Ratio Is High?

A high ratio mortgage requires that you only make a down payment of less than 20% of the home purchase price. The loan amount you get is higher than with traditional mortgages, enabling you to finally get the home you chose.

Putting down a smaller amount may indeed make you look less favourable in the eyes of reputable financial institutions. However, this type of loan is not that risky for lenders since all high ratio mortgages must be insured by the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada, or Canada Guarantee. 

Mortgage-default insurance coverage is required by law in Canada to insure lenders against default on mortgages with less than 20% equity. Even though your lender is the one taking out the mortgage default insurance, its premium is paid by the borrower. This can be added directly to regular payments and will be somewhere between 0.6% and 4.5% of the mortgage amount.

 

Is a High Ratio Mortgage Bad?

A high ratio mortgage is the preferred go-to option for the typical first-time homebuyer that may not have the necessary funds to put down a larger down payment. 

The downside to this type of mortgage loan is that the maximum amortization period for high ratio mortgages is 25 years. In other words, this means that regular payments will be higher than with conventional mortgages, so you need to buckle up for these. 

On the other hand, while with conventional mortgages your payments may be smaller, your interest rate will add up to a lot more over the years.

In the end, there’s no saying if a high ratio mortgage is bad for you or if a low ratio mortgage would be a better option. It all comes down to your specific needs and what you can do to fulfill them by harnessing the market conditions at your disposal.

 

Is It Better To Get a High Ratio Mortgage vs. a Traditional One?

As we’ve said before, it all comes down to the borrowing amount you’re interested in, as well as to the amortization period you’re willing to put up with. 

Choosing between low ratio and high ratio loans shouldn’t only be made by considering your current situation but by seizing a long-term vision as well. Your future self will be in charge of making all these mortgage payments, so you should make a calculated decision.

If you’re unsure about what the numbers look like for a high ratio mortgage, make this simulation yourself. Start knowing what the total purchase price of the home is. Then, estimate what percentage you can afford to pay initially and what your ideal amortization period could be. Also, take into consideration the mortgage insurance premium and other associated costs. 

This exercise will give you an idea of whether this is a good or bad fit for your needs.

If you want to have a more professional input, working with an expert mortgage broker can prove valuable. You’ll have access to both traditional and multiple private lenders, which gives you a good idea of how they will qualify you. It also gives you more flexibility, especially if your circumstances mean that you don’t fit into a category typically recognized by lenders.

 

The Takeaway

For some people, making a home purchase is a once-in-a-lifetime event. For others, it doesn’t even happen at all. This is why purchasing your own home should not be an impulsive decision. The amounts involved are considerable, and your time invested over the long run is precious. 

Make sure you consider all factors and contact a mortgage broker to help you make the right decision if considering getting a high ratio mortgage. In the end, you’ll be able to find the financial solution that’s tailored to your specific needs, meant to take you a definitive step closer to the house of your dreams.

If you want to learn more about getting a high ratio mortgage in BC, Canada, or are interested in consulting with us on the best loan options for you, including home equity loans, no income mortgage, second mortgages and more, simply get in touch.

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