What if you could turn your homeownership dreams into reality without the burden of a massive down payment? High-ratio mortgages in Canada offer just that.
In this guide, we’ll take you on a journey through the world of high-ratio mortgages in Canada, breaking down the complexities and explaining how they can be your ticket to that front door with a brand new key.
What is a High-Ratio Mortgage?
A high-ratio mortgage means paying less than 20% of the home’s price upfront.
Suppose you’re considering a house worth $300,000, a high-ratio deal involves a down payment of less than $60,000. It’s about the ratio of the mortgage (the loan) to the total home price (the value), also known as the loan-to-value ratio. So, the lower your down payment, the higher your loan-to-value ratio becomes.
High-Ratio Mortgages vs. Low-Ratio Mortgages
| Aspect | High-Ratio Mortgage | Low-Ratio Mortgage |
| Down Payment | Less than 20% | 20% or more |
| Loan-to-Value Ratio | Higher | Lower |
| Mortgage Insurance | Required (0.60% – 4.0%) | Not Typically Required |
| Monthly Payments | Higher | Lower |
| Amortization Period | Up to 25 years | Up to 30 years (flexible) |
| Interest Rate | Generally Lower | Generally Higher |
Down Payment
High-Ratio Mortgage: Your entry ticket to high-ratio mortgages is a down payment of less than 20%. For instance, on a $300,000 home, a down payment less than $60,000 signals a high-ratio mortgage.
Low-Ratio Mortgage: If your down payment is 20% or more, you’re in low-ratio mortgage territory. For a $300,000 home, a down payment of $60,000 or more categorizes your mortgage as low-ratio.
Loan-to-Value Ratio
High-Ratio Mortgage: This ratio is higher, indicating that a larger portion of the home’s cost is covered by the mortgage.
Low-Ratio Mortgage: The ratio is lower, reflecting a smaller portion covered by the mortgage and a larger contribution from your down payment.
Mortgage Insurance
High-Ratio Mortgage: You’ll need mortgage default insurance, costing between 0.60% and 4.0% of the mortgage amount. This insurance protects the lender in case of payment default.
Low-Ratio Mortgage: Typically, mortgage default insurance isn’t required, saving you from this additional cost.
Monthly Payments
High-Ratio Mortgage: Monthly payments are higher due to the larger mortgage amount, even with lower interest rates.
Low-Ratio Mortgage: Monthly payments may be lower because of a smaller mortgage amount despite potentially higher interest rates.
Amortization Period
High-Ratio Mortgage: The maximum period is 25 years, leading to higher monthly payments but less interest paid over the life of the loan.
Low-Ratio Mortgage: You can choose a longer amortization period, up to 30 years, resulting in lower monthly payments but potentially more interest paid.
Interest Rate
High-Ratio Mortgage: Despite a higher borrowing percentage, interest rates are usually lower due to the added security of mortgage default insurance.
Low-Ratio Mortgage: While interest rates may be higher, the lower loan amount could balance the overall cost, especially over a longer amortization period.
For example:
For a $350,000 home, if your down payment is less than $70,000, you might opt for a high-ratio mortgage. This could mean a 25-year amortization period, lower interest rates, but with additional mortgage insurance costs. On the other hand, if your down payment is $70,000 or more, a low-ratio mortgage may offer a longer 30-year amortization period, potentially lower monthly payments, and no need for mortgage insurance.
How to qualify for a High-Ratio Mortgage?
Qualifying for a high-ratio mortgage in Canada opens the gateway to homeownership, even if your down payment is less than 20%. Here’s a straightforward guide on how to qualify:
Steady Income is the key
Lenders want confirmation that you can make regular mortgage payments. A stable and verifiable income, whether from employment or self-employment, is crucial. Be prepared to showcase your income through pay stubs, tax returns, or other relevant documents.
Healthy Credit Score
Your credit score plays a significant role. While requirements may vary, having a good credit score improves your chances. Aim for a credit score equal to or higher than 680 for smoother approval. Review your credit report, address any issues, and maintain healthy credit habits.
Debt-to-Income Ratio matters
Lenders evaluate your debt-to-income ratio to make sure you can manage additional debt. Aim to keep your total debt payments, including the mortgage, below 43% of your gross income. Lower debt levels enhance your eligibility.
Proof of Down Payment
Although your down payment is less than 20%, you still need to prove its source. Ensure your funds come from acceptable sources, such as savings, gifts, or government assistance programs. Lenders want assurance that your down payment is legitimate and not borrowed.
Mortgage Default Insurance
Since high-ratio mortgages involve a down payment of less than 20%, mortgage default insurance is a requirement. This insurance is to protect the lender in case of default. Understand the associated costs and be prepared to include them in your overall budget.
Stable Employment History
Lenders typically prefer borrowers with a stable employment history. It demonstrates reliability and the ability to meet financial obligations. Expect lenders to inquire about your job stability and income continuity.
Demonstrate Savings and Financial Responsibility
Highlight your savings habits and responsible financial behavior. Lenders appreciate borrowers who demonstrate financial responsibility through regular savings, emergency funds, and prudent financial management.
Seek Professional Advice
Engage with mortgage professionals or financial advisors to guide you through the process. They can help you understand the basic requirements of high-ratio mortgages, evaluate your financial readiness, and navigate the application process.
Remember, qualifying for a high-ratio mortgage is achievable with careful financial planning and a clear understanding of the lender’s criteria.
Pros and Cons of a High-Ratio Mortgage
Here are the pros and cons you need to know:
Pros:
- Lower initial down payment: With a high-ratio mortgage, you can jump into homeownership with a down payment of less than the standard 20%. It’s a smaller upfront hurdle to clear.
- Sooner entry to the housing market: A high-ratio mortgage lets you join the housing game sooner. You don’t have to wait years to gather a hefty down payment.
- Potential for faster home equity growth: As home values rise, your equity can grow faster. If the housing market is on your side, your property value may increase, boosting your ownership stake over time.
- Mortgage Default Insurance can help: Even though it’s an extra cost, mortgage default insurance can be your friend. It helps you secure a mortgage with a lower down payment, making homeownership attainable.
Cons:
- Higher monthly payments: Monthly mortgage payments may be higher. With a larger loan amount, be prepared for a bit more weight on your monthly budget.
- Mortgage Default Insurance costs: It’s protection for the lender, but you foot the bill. Mortgage default insurance comes with a price, adding to your overall mortgage costs. It’s an extra expense to factor in.
- Slower Equity build-up: While your home’s value may rise, your equity might not grow as quickly. With a smaller initial down payment, it takes time to catch up on building a substantial ownership stake.
- Limited lender flexibility: Some lenders might be stricter with high-ratio mortgages. You may have fewer options and less flexibility in negotiating terms than a conventional mortgage.
Ultimately, it’s about finding the right fit for your financial journey. A high-ratio mortgage can be a stepping stone to homeownership, but it comes with its trade-offs. So, choose wisely!
Alternatives to a High-Ratio Mortgage
Consider Government Programs
Canada’s got some tricks up its sleeve! Explore government programs like the Home Buyers’ Plan (HBP) or the First-Time Home Buyer Incentive. These initiatives can offer a leg up, making homeownership more achievable.
Explore Co-ownership
Co-ownership with a family member or friend can be a game-changer. Pooling resources means a bigger down payment, shared responsibilities, and the chance to break into the real estate market together.
Explore Rent-to-Own Programs
Test the waters with a rent-to-own program. This allows you to rent a property with the option to buy later, giving you time to save for a larger down payment.
Your path to Home Sweet Home
And there you have the roadmap to homeownership in Canada. Whether you’re drawn to the simplicity of a high-ratio mortgage or prefer exploring alternative routes, remember this journey is uniquely yours. So, take your time, weigh the pros and cons, and walk into homeownership with confidence.
Your dream home is waiting!
