Understanding High-Ratio (Insured) Mortgages in Canada

What is a High-Ratio Mortgage?

When purchasing a home, many Canadians may not have enough money saved up to put a traditional 20% down payment. In these situations, a high-ratio mortgage can be an option. A high-ratio mortgage is a type of mortgage where the borrower is putting down less than 20% of the purchase price of the home. In Canada, high-ratio mortgages are subject to different regulations and requirements than traditional mortgages.

How Do High-Ratio Mortgages Work?

High-ratio mortgages are designed to help first-time homebuyers or those with limited funds to purchase a home. With a high-ratio mortgage, the borrower is borrowing more than 80% of the purchase price of the home, which means that they will be required to purchase mortgage default insurance. Mortgage default insurance protects the lender in case the borrower defaults on their mortgage payments.

The cost of mortgage default insurance is based on the amount of the mortgage and the down payment. The insurance premium can either be paid upfront or added to the mortgage amount. The insurance premium can range from 1.8% to 4% of the mortgage amount, depending on the down payment amount.

What Are the Requirements for a High-Ratio Mortgage?

To qualify for a high-ratio mortgage in Canada, the borrower must meet certain requirements. These requirements include:

  1. Minimum down payment: The borrower must have a minimum down payment of 5% of the purchase price of the home depending on the price. See Government Guidelines here.
  2. Maximum purchase price: The maximum purchase price of the home cannot exceed $1 million.
  3. Maximum amortization period: The maximum amortization period for a high-ratio mortgage is 25 years. Note: Canada is now allowing 30-year amortization for first-time homebuyers purchasing a new home.
  4. Debt service ratios: The borrower’s debt service ratios must meet certain requirements. The gross debt service ratio (GDS) must be no more than 39% of the borrower’s gross income, and the total debt service ratio (TDS) must be no more than 44% of the borrower’s gross income.
  5. Credit score: The borrower’s credit score must meet the lender’s and insurer’s requirements.

What Are the Advantages and Disadvantages of a High-Ratio Mortgage?

There are advantages and disadvantages to choosing a high-ratio mortgage.

Advantages:

  1. Lower down payment: With a high-ratio mortgage, the borrower can purchase a home with a lower down payment.
  2. Easier to qualify: High-ratio mortgages have more relaxed requirements than traditional mortgages, making it easier for borrowers to qualify.
  3. Lower interest rates: High-ratio mortgages are insured and therefore seen as lower risk. This often translates into lower interest rates than a conventional mortgage.

Disadvantages:

  1. Mortgage default insurance: Borrowers with a high-ratio mortgage are required to purchase mortgage default insurance, which adds an additional cost to the mortgage.
  2. Equity: With a lower down payment, the borrower has less equity in the home. This can make it more difficult to sell the home or refinance the mortgage in the future.

How Can Borrowers Minimize the Costs of a High-Ratio Mortgage?

Borrowers can take steps to minimize the costs of a high-ratio mortgage.

  1. Improve credit score: Borrowers can improve their credit score by paying off debts and making payments on time. A higher credit score can result in a lower interest rate and lower mortgage default insurance premiums.
  2. Shop around for mortgage rates: Borrowers should shop around for the best mortgage rates to ensure they are getting the best deal possible.
  1. Make a larger down payment if possible: While a high-ratio mortgage requires a minimum down payment of 5%, borrowers may choose to put down a larger down payment if they have the funds available. A larger down payment can result in lower mortgage default insurance premiums and a lower interest rate.
  2. Choose a shorter amortization period: While the maximum amortization period for a high-ratio mortgage is 25 years, borrowers may choose to have a shorter amortization period. This can result in lower interest charges over the life of the mortgage.

High-ratio mortgages can be a good option for first-time homebuyers or those with limited funds to purchase a home. However, they come with higher costs than traditional mortgages, such as default insurance premiums. Borrowers should carefully consider their financial situation and options before choosing a high-ratio mortgage. By taking steps to minimize the costs of a high-ratio mortgage, borrowers can ensure that they are getting the best deal possible.

The Government of Canada’s Financial Consumer Agency provides guidelines for down payments based on the purchase price of a home.

For homes with a purchase price of $500,000 or less, the minimum down payment is 5% of the purchase price. For example, if a home costs $400,000, the minimum down payment required would be $20,000 (5% of $400,000).

For homes with a purchase price between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000, plus 10% of the portion of the purchase price above $500,000. For example, if a home costs $700,000, the minimum down payment required would be $45,000. This is calculated as 5% of the first $500,000 ($25,000) plus 10% of the remaining $200,000 ($20,000), for a total of $45,000.

For homes with a purchase price of $1 million or more, the minimum down payment is 20% of the purchase price. For example, if a home costs $1.5 million, the minimum down payment required would be $300,000 (20% of $1.5 million). Homes in this price range are not eligible for mortgage default insurance under the current program.

It’s important to note that while the minimum down payment is 5%, it’s often recommended to put down more if possible. A larger down payment can result in lower monthly mortgage payments, as well as lower mortgage default insurance premiums if the down payment is less than 20% of the purchase price.

It’s also important to consider other costs associated with purchasing a home, such as closing costs and ongoing expenses like property taxes and home maintenance. Talking to a mortgage broker can help clarify exactly what you would qualify for and the associated insurance premiums.

Types of Mortgages in Canada

For more information on high-ratio insured mortgage products call 416-912-6200