If you’re considering taking a mortgage, you may have come across the term high ratio mortgage. This type of mortgage allows you to borrow a larger portion of a property’s value, often making it a good option for those entering the housing market.
In here, we’ll dive into the details of high-ratio mortgages, exploring how they work and what you need to know before committing to one.
What is a high ratio mortgage?
A high-ratio mortgage refers to a loan where the down payment is less than 20% of the home’s purchase price. This type of loan is often referred to as a high-ratio insured mortgage, as it is insured by government-backed entities like Canada Mortgage and Housing Corporation (CMHC), which helps reduce the risk for lenders and allows borrowers to purchase a home with a smaller down payment.
Why are high-ratio mortgages cheaper?
High-ratio mortgages can be cheaper to qualify for because they allow buyers to purchase a home with a smaller down payment, sometimes as low as 5%. This makes homeownership more accessible for first-time buyers. Although the mortgage amount is larger relative to the home’s purchase price, the required mortgage loan insurance protects the lender, which can result in competitive interest rates.
While interest costs might be higher due to insurance premiums, the overall mortgage payment can still be more affordable for those with limited savings.
How high-ratio mortgages work
Qualifying for a high-ratio mortgage involves meeting specific requirements to secure a loan with a smaller down payment. Let’s break down the essentials to help you understand how this type of mortgage works:
Minimum down payment
The minimum down payment for a high-ratio mortgage is typically 5% for homes priced under $500,000. For homes above that price, the down payment increases to 10% for the portion above $500,000.
If the purchase price exceeds $1 million, you wouldn’t have been able to qualify for a high-ratio mortgage earlier, as a minimum down payment of 20% would have been required. However, effective December 15, 2024, the Canadian federal government increased the maximum purchase price for an insured mortgage to $1.5 million, allowing buyers to access a high-ratio mortgage with less than 20% down for homes up to this new limit.
Loan-to-Value ratio (LTV)
The LTV ratio is a critical element in qualifying for a high-ratio mortgage. It represents the percentage of the home’s purchase price or appraised value that you’re borrowing. For a high-ratio mortgage, this ratio typically exceeds 80%, meaning you’re borrowing more than 80% of the property value. Lenders use this ratio to assess the risk of the loan, and a higher LTV will usually result in the need for mortgage insurance to protect the lender.
Credit score
Your credit score is one of the main factors lenders consider when evaluating your ability to repay the loan. A higher credit score generally indicates you are a low-risk borrower, which can lead to better interest rates and terms. A lower credit score, on the other hand, may result in higher mortgage insurance premiums, or you might need a larger down payment to offset the risk.
Amortization period
The amortization period is the time you have to pay off your mortgage in full. For high-ratio mortgages, the maximum amortization is generally 25 years. However, as of December 15, 2024, 30-year amortizations will be available for all first-time home buyers, regardless of whether they have an insured mortgage, according to the Canadian federal government.
A shorter amortization period means higher monthly payments, but less interest paid over time. On the other hand, a longer period may reduce monthly payments, but you’ll pay more in interest in the long run.
Mortgage default insurance
Since high-ratio mortgages involve borrowing a large percentage of the home’s value, they require mortgage insurance. This insurance protects the lender if you default on the loan. The premium is based on the size of your down payment and the LTV ratio. The larger your down payment, the lower the premium, which can help reduce your overall costs.
Pros and cons of high-ratio mortgages
| Pros | Cons |
| Lower down payment: You can purchase a home with as little as 5% down, making homeownership more accessible. | Mortgage insurance costs: You’ll need to pay for mortgage insurance, which increases your overall costs. |
| Easier for first-time buyers: A high-ratio mortgage allows first-time homebuyers to enter the market with a smaller down payment. | Higher monthly payments: Since you’re borrowing more, your mortgage payment is generally higher compared to a conventional mortgage. |
| Faster homeownership: You don’t need to wait years to save a larger down payment, allowing you to become a homeowner sooner. | Eligibility requirements: You must meet specific criteria, such as a good credit score and a reasonable debt service ratio. |
Alternatives to a high-ratio mortgage
Conventional mortgage
A conventional mortgage requires a larger down payment (typically 20% or more of the home’s purchase price) and does not require mortgage insurance. This option is suitable for buyers who have saved enough for a larger down payment and want to avoid the additional cost of insurance premiums.
High-ratio mortgages vs. conventional mortgages
| Feature | High-Ratio Mortgage | Conventional Mortgage |
| Down Payment | Minimum of 5% (for homes costing $500,000 or under) | Typically 20% or more of the home’s purchase price |
| Loan-to-Value Ratio (LTV) | Higher than 80%, often above 90% | LTV is 80% or lower |
| Mortgage Insurance | Required | Not required since down payment is 20% or more |
| Eligibility | Easier for first-time buyers with a smaller down payment | More suitable for buyers with substantial savings |
| Interest Rates | May be slightly lower due to mortgage default insurance | Could be slightly higher as it is uninsured |
| Monthly Payments | Typically higher due to larger loan amounts | Typically lower monthly payments due to larger down payment |
Government programs
In some regions, there are government-backed programs, such as first-time homebuyer incentives or grants, that allow for lower down payments or even no down payment in certain cases. These programs may provide more affordable ways for buyers to enter the housing market without the need for mortgage insurance.
Home equity loans
A home equity loan is a type of mortgage that allows homeowners to borrow against the equity in their property. This can be a viable option if you have built significant equity and need to borrow additional funds, either for home improvements, a down payment on a new home, or to consolidate debt.
Home equity loans with Alpine Credits
If you’re a homeowner with equity built up in your property, Alpine Credits offers home equity loans which can help raise enough money for a down payment with less stringent requirements. These loans allow you to borrow against the value of your home, providing a lump sum that can be used for purposes like debt consolidation, renovations, or business investments.
Apply for a home equity loan in three easy steps:
- Apply online—The application with Alpine Credits is simple and can be completed in minutes. You don’t need to provide your credit score or income history. All you need is your home equity value.
- Get approved—If you own 25% of your home, you’re eligible for a home equity loan and can be approved in as little as 24 hours.
- Receive funding—Alpine Credits will deposit the money directly into your bank account within a few days of your approval.
If you have more questions, contact a Financial Solutions Specialist at Alpine Credits for a free, no-obligation quote today.
Is it better to get a high ratio mortgage?
Whether a high-ratio mortgage is better depends on your ability to make a larger down payment; if you have less saved, it allows you to buy a home sooner, but it comes with the added cost of mortgage default insurance.
What is considered a high ratio?
A high-ratio mortgage is typically considered when the loan-to-value (LTV) ratio exceeds 80%, meaning you borrow more than 80% of the home’s purchase price or appraised value.
Are mortgage rates higher for high-ratio mortgages than conventional mortgages?
High-ratio mortgages typically have lower interest rates than conventional mortgages because they are insured against default. However, the overall cost can be higher due to the additional premiums for mortgage default insurance.