Is it better to get a high ratio mortgage?

Updated Oct 02, 2024

Whether you are hoping to purchase a home in Toronto, Calgary, or anywhere in Canada, you will have to crunch a lot of numbers to maximize affordability. At this stage, it is critical to account for your household income and your long-term financial goals. Your debt obligations and your monthly bills must also be taken into account before taking out a home loan.

Another important consideration you will need to make is the size of your down payment. That is where high ratio mortgages come in. It is an alternative for aspiring homebuyers who cannot make the usual amount percentage needed to apply for a typical property loan in the country. But what is it exactly?

In this article, we will discuss what a high ratio mortgage is and how it works. We will also talk about the threshold for a high ratio mortgage in Canada and compare it with conventional mortgages. Curious to find out if you can refinance a high ratio mortgage and if it is worth it? Read on to know more.

To our usual readers who are professionals in the mortgage industry, this guide to high ratio mortgages is another one of our client education pieces. So, if you have clients who are interested in this topic, sharing this with them is a must!

What is a high ratio mortgage?

A high ratio mortgage is when a borrower makes a down payment of under 20% of the purchase price of a house. In other words, a high ratio mortgage is a mortgage with a loan-to-value ratio over 80%. A conventional mortgage, on the other hand, is a mortgage where the borrower pays over 20% on the down payment.

Want to know more about what it means to have a high ratio mortgage in Canada? Watch this clip:

Are you set on getting a high ratio mortgage? Read our guide on conventional mortgages first to get a fuller picture of what options are available.

How does a high ratio mortgage work?

A high ratio mortgage allows you to buy a home with a down payment that is lower than the usual amount required by mortgage providers. With a high ratio mortgage, you borrow more than 80% of the property's value. In other words, you have a high ratio mortgage if you purchase a property and make a down payment under 20%.

On the contrary, low ratio mortgages, which are sometimes referred to as conventional mortgages, are for less than 80% of the value of the property. A down payment of more than 20% is needed for it to be considered a low ratio mortgage.

Compared to a low ratio mortgage, a high ratio mortgage essentially means that you are borrowing more money. This makes this type of mortgage riskier for banks and other mortgage lenders. This is also why mortgage default insurance is highly important for most home loan providers when dealing with high ratio mortgages.

What is the threshold for a high ratio mortgage in Canada?

If you take out a home loan and your loan-to-value (LTV) ratio is more than 80%, it will automatically be considered as a high ratio mortgage. The minimum threshold for down payment when applying for a high ratio mortgage in Canada is 5%.

For instance, if you want to purchase a home with a value of $800,000, the lowest amount that you can go for down payment is $40,000. This means that the bank or mortgage lender that will let you borrow will need to grant your home loan with a 95% LTV ratio.

High ratio mortgage vs conventional mortgage

One major difference between high ratio mortgages and conventional mortgages is that mortgage default insurance is necessary for the former and not required for the latter. The Canada Mortgage and Housing Corporation (CMHC) and other private insurers offer this type of insurance in Canada as a guarantee for mortgage companies in case of default by the borrower.

However, this type of insurance is not free of charge—you are required to pay CMHC mortgage insurance premiums that are calculated based on your mortgage’s LTV ratio.

The LTV ratio of your mortgage is the appraised value of the home, or the purchase price compared to the dollar amount that you want to borrow. For example, the LTV ratio of your mortgage would be 90%, if you made a 10% down payment on the house. Your LTV ratio would be 80% if you made a down payment of 20%.

Learn more about the difference between high ratio mortgage versus conventional mortgage when you watch this video:

To find out if a high ratio mortgage suits your needs, speak with a mortgage professional. Choose from among the top 75 mortgage brokers in Canada for expert advice.

Is a high ratio mortgage cheaper than a low ratio mortgage?

Homebuyers in Canada must pay at least a 5% down payment on a house with a price tag of $500,000 or lower. That amount leaps to 10% for any house priced at over $500,000 and as high as $1 million. If you are looking to purchase a home in the country that is more than $1 million, you will be required to pay at least 20% deposit.

A high ratio mortgage is required for any homebuyer purchasing a home and paying less than 20% down. If you, as a borrower, have a high loan-to-value ratio of between 80% to 95% and between 5% to 20% equity paid into the home, that would require a high ratio mortgage. If, on the other hand, you buy a home with more than 20% down payment, you might want to go for a low ratio mortgage instead.

Are high ratio mortgages risky?

Since there is less immediate equity in the home, high ratio mortgages are seen as bigger risks for banks and mortgage lenders. It could be harder for any home loan provider to recoup the loss in total in the event of a default. This is why the federal requirement of mortgage insurance has become law.

A high ratio mortgage can be taken out with a down payment as low as 5% of the purchase price, thanks to mortgage default insurance. In turn, it makes it less of a risk for banks and mortgage lenders since they are insured in the event that the borrower defaults on the mortgage.

This is also why the housing market is open to far more people. Homebuyers are using mortgage insurance to purchase homes with smaller down payments, allowing them to enter the housing market sooner.

If you get a high ratio mortgage, you will need mortgage insurance. This is available through three Canadian default insurance providers:

• Canada Mortgage and Housing Corporation (CMHC)
• Sagen (formerly Genworth Financial Canada)
• Canada Guaranty

Curious to know more about how mortgage default insurance works? Check out this video where the insurance providers CHMC, Sagen, and Canada Guaranty are discussed in relation to high ratio mortgages:

What are the advantages of high ratio mortgages?

There are many advantages when taking out a high ratio mortgage in Canada. Here are some of them:

• you might get lower mortgage interest rates
• you will be able to purchase your dream home with a lower down payment
• you can start building equity sooner and use it for future investments or renovations

Aside from these advantages, another perk when choosing a high ratio mortgage is the incentives for first time home buyers. Various government programs can complement high ratio mortgages. In turn, many of these first time home buyer programs in Canada provide additional financial support.

Are there disadvantages in taking out a high ratio mortgage?

There are also some disadvantages when you choose to apply for a high ratio mortgage in Canada instead of the conventional home loans. Below are some of them:

• you might face higher monthly payments for your property loan
• you need to pay the mortgage default insurance costs
• you have a shorter period for your amortization (maximum 25 years vs. 30 years for conventional mortgages)

You might also experience stricter debt-to-income ratios if you take out a high ratio mortgage. Still, this option is best for those who cannot afford the usual amount needed for deposit when applying for conventional mortgages.

There might be some cons, but banks and other mortgage lenders can sometimes be in favor of high ratio mortgages. This is due to the mortgage default insurance that it automatically requires. As Canadians face an increase in their mortgage debt, there is a greater risk of default. But if your home loan has an insurance, you might have a bigger chance of getting your mortgage application approved.

Can I refinance a high ratio mortgage?

The immediate answer is no. Banks and other mortgage providers will not allow you to refinance if you have a high ratio mortgage. This is because lenders require a minimum LTV ratio of 80% or less.

If you want to refinance your home, make sure that you prepare for a higher down payment to get a lower LTV ratio. Learn more on making down payments on a house when you read this article.

Is a high ratio mortgage worth it?

All in all, taking out a high ratio mortgage is worth it if your financial capacity and personal goals are aligned with choosing a home loan with a lower down payment. The same is true if you apply for a conventional mortgage instead. Your decision as a home buyer will all pay off in the long run.

Do you think that this guide to high ratio mortgage is helpful? Why or why not? Let us know what you think in the comments section below.