High Ratio Mortgages Explained

Purchasing your dream home comes with a lot of different possibilities and options. One of the most popular options is a high-ratio mortgage. This blog will help you understand what a high-ratio mortgage is and how it might be the right option for you.

What is a high-ratio mortgage?

A high-ratio mortgage is a type of home loan that has a down payment of less than 20%. It is known as a high-ratio mortgage because the borrower's loan to value is high. In simple terms, it has a higher ratio of debt than other types of loans. For example, if you purchase a home with a down payment of 5%, you would have a high-ratio mortgage. That is because your loan-to-value ratio is 95%. In comparison, if you make a down payment of 20% or more on the home, then your loan-to-value ratio would be 80%.

A Loan to value ratio is the percentage of the loan to the value of the property. It is usually expressed as a percentage, such as 80%. For example, if a home is $200,000 and you put down 20%, then your loan-to-value ratio is 80%. If you put down 10%, then it's 90%. If you put down 0%, it's 100%.

What you should know about high ratio mortgages

While this type of mortgage allows you to purchase a home with a lower down payment, there are some drawbacks. In that case, it is important to equip yourself with some relevant information. Here are some important points you need to know before making a decision.

1. You will need to pay for CMHC insurance on high-ratio mortgages

This is an insurance policy that protects lenders against the risk of default on your mortgage. The CMHC charges interest on this insurance, which can add thousands to your loan. It is only available for home purchases of less than $1,000,000. Anything higher than that requires a 20% down payment or higher. These premiums are paid by you, the borrower as part of your monthly mortgage payment.

2. High ratio mortgages are often lower because they are insured.

Mortgage rates are lower on high ratio mortgages. The reason for this is simple. Lenders don’t have to worry about default risk as much, so they can offer better rates.

Benefits and limitations of high ratio mortgages

High-ratio mortgages have their benefits and limitations. One of the biggest benefits of a high ratio mortgage is that it allows you to buy a home without having to save up a large down payment. If you want to get into the market quickly, this is one of the best options available.

On the other side, there are a few disadvantages to taking out a high-ratio mortgage. One of the most obvious is that you’ll have to pay higher interest rates and fees than someone with a 20% or higher down payment. This, plus insurance can make your monthly payments higher, which means it can be difficult to afford other expenses.

Conclusion

Buying a home can be daunting at times but it doesn't have to be a headache. To understand if this type of home loan is the proper solution for your specific need please don’t hesitate to contact me at your earliest convenience to discuss. I offer several mortgage solutions aside from high ratio that may be available to you. I work with industry-leading lenders with diverse mortgage options that are committed to helping clients like yourself find the right solution for your situation. If you have any questions or would like more information I'm just a Call or Text away.