High Ratio Mortgage

As long as you purchase mortgage loan insurance, you may be able to contribute less than 20% of the purchase price of the home. Loans for as little as 5% down and 95% borrowed are available. The insurance premium may be paid in full at the time of closing, or it may be added to your mortgage payment.

The fact that your down payment is low in comparison to the amount you are borrowing turns this type of mortgage into high ratio loan. Instead of the ratio being 20 to 80 like in a conventional mortgage, it may be 5 to 95, with the lender taking a much larger risk.

Costs of High Ratio Mortgages

As you might expect there are costs associated with the lender extending you a higher risk loan. In exchange for the higher risk, you may pay a higher interest rate. This is in addition to the mandatory CMHC / Genworth / CG Capital Insurance Premium.

This mortgage insurance is mandatory and requires you to pay insurance that protects the lender in case you ever default. This is not the same as you purchasing mortgage life insurance. This is insurance that is only for the protection of the lender’s investment.

When High Ratio Mortgages Make Sense

If you can purchase your home and have the mortgage payments add up to less than what you pay in rent, then it’s time to consider a high ratio mortgage. Each month you make your mortgage payment you are investing in a future where you don’t have rent payments—something a renter can never look forward to.

The increased interest rate, insurance payment, property taxes and strata fees may be worth it even if the total payout is slightly higher than rent would be when you consider that you are working toward a rent-free future.

What Do You Need to Secure a High Ratio Mortgage

Lender’s requirements are stricter for this type of mortgage than for others. The lender is going to look carefully at your gross debt service. The amount you will be spending on all housing costs when the loan is approved cannot be more than 35%-42% of your income if you are below 680. House expenses include your mortgage payment, taxes on the property, utility costs, condominium fees, CMHC/Genworth mortgage insurance if you don’t pay this up front, and HOA fees.

The total debt you owe for other loans and credit cards is considered against your income. When these debts, such as car loans and credit cards, are added to your total debt, they cannot exceed 44% of your monthly income if you are above 680.