Buying a home is always a mix of asking fun and exciting questions as well as heavier and even stressful questions that can have long term implications. The fun and exciting questions are related to searching realtor websites and exploring which neighbourhoods are most appealing. On the other hand, questions related to affordability, interest rates, down payments and the like take some time to hash out and can often be overwhelming for home buyers, especially for first timers.
Perhaps one of the greatest hurdles with home buying, particularly for first time buyers, is the down payment. Depending on the housing market you are in across the country, building up enough money for a down payment can be a huge mountain to climb.
Over the years, down payment requirements have been adjusted to accommodate for the soaring house prices seen in some housing markets. This article will cover these adjustments and help you choose what's best for you as you consider what your next mortgage might look like.
Related: Open vs. Closed Mortgages
High Ratio vs. Conventional (Low Ratio) Mortgages
High ratio and conventional mortgages have to do with how much of a down payment you are able to pull together for the home you are buying. For years, the conventional amount required for purchasing a home was 20% - hence the name: a conventional mortgage.
For many people, coming up with a down payment of 20% takes some work, but it is often manageable. First time home buyers will often go the route of renting a cheaper apartment or townhouse in order to save up that big lump sum of money.
More recently though, with housing prices rising significantly in some areas, lenders have been forced to consider how to make home buying more accessible. In high-priced housing markets where homes are priced at nearly $1M or more, coming up with a conventional down payment of 20% is suddenly much more difficult.
What Is A High Ratio Mortgage?
High ratio mortgages include any mortgage that requires a down payment of less than 20%. Today, lenders are often willing to go as low as 5-10% down. This makes purchasing that $850,000 home in Vancouver or Toronto a little more accessible.
Lenders are typically willing to offer as low as 5% down on homes up to $500,000. For homes between $500,000 and $1M, lenders would typically require 10% down. For a home that is priced above $1M, lenders will stick to a conventional mortgage with a down payment requirement of 20%.
| Purchase Price of Home | Minimum Down Payment Requirement |
|---|---|
| Up to $500,000 | 5% |
| $500,000 - $1,000,000 | 10% |
| $1,000,000 and above | 20% |
For homeowners, this kind of accessibility drives up the loan-to-value (LTV) as the mortgaged amount can often be between 90-95% instead of the conventional 80%. This is obviously a win for the homeowner as they can more easily get into homeownership and building equity. However this puts the lender at risk with such a large amount of money being borrowed.
Mortgage Default Insurance
With lenders finding themselves at risk as they offer lower down payment requirements, most will require mortgage default insurance from the homeowner in order to compensate for the high loan-to-value. To be clear, this insurance is to cover the LENDER in case the borrower cannot make payments on their mortgage.
When it comes to mortgage default insurance, The Canadian Mortgage and Housing Corporation (CMHC) is one of three institutions that offers this solution to homeowners and lenders. There are alternative private insurers, but because CMHC is a Crown corporation backed by tax-payers, it is by far the most commonly used.
How Much Does CMHC Insurance Cost?
Insurance premiums through CMHC range from 0.60% up to 4% depending on the loan-to-value ratio you are working with. A higher LTV will result in larger insurance premiums. If you are a home buyer, you can determine your CMHC insurance premium here.
Here are a few examples to consider.
Let's say you are purchasing a home that is worth $400,000. Most lenders will take the risk and forego mortgage default insurance if you are able to come up with $80,000 (20%).
If you are only able to put down $40,000 (10%), your loan-to-value works out to 90%. On top of the borrowed amount of $360,000, you will pay an extra $11,160 for insurance premiums.
If you go with an even smaller down payment of just $20,000 (5%), your loan-to-value works out to 95%. In this scenario, your initial borrowed amount is $380,000 and you will pay an extra $15,200 for insurance.
| Purchase Price | Down Payment | Percentage | Borrowed Amount | LTV | Premium Percentage | Insurance Amount |
|---|---|---|---|---|---|---|
| 400,000 | 80,000 | 20% | 320,000 | 80% | N/A | N/A |
| 400,000 | 40,000 | 10% | 360,000 | 90% | 3.1% | 11,160 |
| 400,000 | 20,000 | 5% | 380,000 | 95% | 4.0% | 15,200 |
It's worth noting that the insurance amount you might owe if you put anything less than 20% down will be paid out over the full amortization period of the mortgage. Even with $15,000 of insurance on a $400,000 house at 5% down, your monthly mortgage payment (or bi-weekly payment if you choose) will be only marginally higher.
Read more about bi-weekly or monthly mortgage payments.
Is A High Ratio Mortgage For You?
A high ratio mortgage primarily comes down to the degree to which you are comfortable borrowing money. If saving up for a big down payment is a challenge in the market you are in and if mortgage default insurance is tolerable for you, a high ratio mortgage can be a great path to take.
Alternatively, not everyone likes putting themselves in a position of high risk. If this is you, it can be better to keep saving and wait until you are able to lock into a more conventional mortgage with 20% down.
Like any situation, numerous other factors like housing marketing and interest rates also play into the equation. Be sure to check in with a financial advisor or a mortgage specialist to assess your situation and see which approach is best for you.
