HomeA high ratio mortgage is a mortgage that has a loan-to-value (LTV) that is more than 80% — which means that the down payment made is less than 20% of the home's purchase price. The loan-to-value ratio is important for both lenders and borrowers in the process of purchasing a home. Lenders use this ratio to evaluate loan risk in the chance that the borrower defaults on their payments. One the side of the borrower the loan-to-value ratio is an important ratio that helps determine approval for the desired mortgage amount. If a borrower has a high-ratio mortgage they will require mortgage default insurance.
Learn More: Mortgage Default (CMHC) Insurance In Canada
Example: high-ratio mortgage calculation
Let's look at an example where the mortgage on a home would be considered a high-ratio loan. Let's consider the purchase of a home in Canada for $675,000 with a minimum down payment applied. We can see from this mortgage down payment calculator that the minimum down payment would be $42,500 on the purchase price of this home. After the down payment is applied to the purchase price a mortgage of $632,500 would be needed to cover the remaining amount.
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Loan-to-Value (LTV) Calculation
$632,500 mortgage amount
/ $675,000 purchase price
= 93.70% loan-to-value ratio
Since the loan-to-value calculation on this home is more than 80% this would be considered a high-ratio mortgage. We can also determine a high-ratio mortgage from the down payment made on the purchase price. In this instance the minimum down payment percentage was 6.30% of the purchase price. Since the minimum down payment amount is less than 20% the mortgage would be considered a high-ratio loan.
Why are high-ratio mortgage rates lower?
Since high-ratio mortgage are insured with mortgage default (CMHC) insurance, lenders are able to offer lower rates since there is less risk when compared to a conventional loan. However, it is important to take into consideration the cost associated with mortgage insurance. While the mortgage rates with an insured mortgage are more favourable, the insurance premiums increase the total size of your mortgage which adds additional costs.
High-ratio mortgages vs. conventional mortgages
A conventional mortgage is a loan that is no more than 80% of the purchase price of the home — in other words a loan-to-value ratio of 80% or less. This also means that the down payment made on the purchase of the home is 20% or more. Since CMHC insurance is not required on conventional mortgages they often have higher mortgage rates when compared to insured high-ratio mortgages.