Owning a home comes with a lot of expenses. Mortgage payments, utilities, property taxes and maintenance are just some of the things you’ll need to budget for. Since adjusting to these costs can take some time, you need to be prepared from the start. But some new homeowners are caught off guard by how a high-ratio mortgage can affect their monthly expenses.
A high-ratio mortgage is a loan with a down payment of less than 20% of the purchase price of the home you’re buying. The term “high ratio” refers to the spread between the mortgage amount (the loan) and the purchase price (the value). This spread is more commonly known as the loan-to-value ratio.
Conversely, you’ll have a low-ratio (or conventional) mortgage when you have a down payment of 20% or more of the purchase price.
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High-ratio mortgages require mortgage loan insurance, which is an extra premium that is added to your regular mortgage payments and protects your lender in the event you default. The total cost is typically between 0.6% to 4.50% of the amount of your mortgage.
Since high-ratio mortgages must satisfy the requirements of mortgage loan insurance, they all share the following features:
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All high-ratio mortgages require mortgage loan insurance, and how much you’ll pay depends on your down payment.
For example, the Canada Mortgage and Housing Corporation (CMHC) charges:
As you can see, the premium is lower if you have a bigger down payment. You can choose to pay the insurance premium upfront as a lump sum, but most people have it rolled into their mortgage so it’s part of their regular payments. CMHC is the largest mortgage default insurance provider, but your mortgage might instead be backed by Sagen or Canada Guaranty Mortgage Insurance Company, which are private lenders.
Although you may not have a choice when it comes to getting a high-ratio mortgage, you should still understand how it affects you.
Although whether you get a high-ratio mortgage is based on the size of your down payment, you may have a few options, depending on your situation.
High-ratio mortgages cost more than conventional mortgages, but they’ve become quite common in Canada due to rising real estate prices. If you need to get one, don’t worry too much about it — they were created to help people with smaller down payments buy homes. If they make it possible for you to buy a home, they’re doing their job.
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Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.