What is a high ratio mortgage?

Jul 18

What is a high ratio mortgage?

When referring to a mortgage on a residential property, a high-ratio mortgage is one in which the borrower borrows more than 80 percent of the real estate security.  In the case of a self-employed borrower, generally those mortgages in which the amount loaned is more than 75 percent of the real estate security are considered to be high-ratio.  Put another way, if your down payment is less than 20 percent of the purchase price (or appraised valuation) of the property, you are considered to be seeking a high-ratio mortgage.

Also known as an insured mortgage, a high-ratio mortgage are generally considered to be riskier than a conventional mortgage.  This is because the amount of available equity in the property is reduced, should the borrower end up defaulting on his loan.  In other words, the bank (or other lender) is taking a bigger risk in lending that much of the purchase price of a home than they would if they were to lend, say, 70 percent of the purchase price.  Because of the higher risk associated with high-ratio mortgage loans, borrowers who seek high-ratio mortgages must pay a default insurance on top of the amount they are borrowing, to protect the lender in the event that the borrower defaults on the payments.  Mortgage insurance is generally purchased through one of Canada’s main default insurers, which are:  Canada Mortgage and Housing Corporation (also known as CMHC), Genworth Financial and Canada Guarantee.

PIC

The insurance cost is generally added on to the total amount of the mortgage loan and then amoritized over the length of the loan, although some borrowers prefer to have the insurance added in to the closing costs calculation (although this is rare).

In recent years, high-ratio mortgages have become increasingly more common in the Canadian mortgage industry.  These loans are ideally suited to a borrower who has a good, steady flow of income but who has been unsuccessful at finding a way to save for a large down payment.  For example, someone who is fresh out of college may have a good job, but may not have been in the workforce long enough to have saved up enough for a down payment.

PIC

Insured (high-ratio) mortgages are suitable for those in various other situations, too.  They can be secured for first or second mortgages, on secured lines of credit.  Those with bad credit can also qualify, as can those with atypical income situations, such as those who are self-employed (self-employed Canadians often find it harder to secure loans than those with traditional jobs).

Through a mortgage broker Fort McMurray residents can potentially purchase a house with as little as 5 percent down payment by way of a high-ratio mortgage.  That opens the home ownership market to many people who might otherwise not be able to afford to purchase a new home.  Instead of the traditional 20 or 25 percent down payment required to get a traditional mortgage, which can be prohibitive to many potential homebuyers, a high-ratio mortgage allows buyers to borrow more, requiring them to come up with a much lower down payment.