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Mortgage Maestro makes mortgages easy. Continue reading to learn more about mortgages, the latest industry updates and meeting your financial goals.

What is a high-ratio mortgage?

Applying for a mortgage to purchase your dream house can leave you with many unanswered questions. You can best prepare yourself for the process by learning more about the frequently used terms. One such term is a high ratio mortgage.

Today in Canada, there are two kinds of mortgages, low and high ratio. Depending on which one you choose, you can receive a low-interest rate offer. It can help you save thousands of dollars during the lifetime of your mortgage.

high ratio mortgage

What is a low ratio mortgage?

When you make a 20 percent down payment and obtain a mortgage for 80 percent of the appraised value, it is called a low ratio mortgage. In such instances, you don’t have to purchase mortgage default insurance, saving you thousands of dollars in the long run.

What is a high ratio mortgage?

Many young Canadians are facing a challenge in making a 20% down payment. Luckily, they can access a high ratio mortgage which requires a lower down payment (ranging between 5% -10%). The name high ratio mortgage comes from the loan value. In other words, since your down payment will be lower, you will be borrowing more money to purchase the property. Lenders will calculate the loan-to-value (LTV) ratio before approving the mortgage application.

What is an LTV (Loan to Value) ratio?

Most homeowners may not be aware of a loan-to-value ratio since lenders use it to calculate borrowers’ eligibility. However, learning more about it can help your mortgage application. Before we share the formula, here are some details about LTV. An LTV ratio is most frequently used to determine the risk associated with a mortgage. Lenders may hesitate to fund high-risk mortgages to avoid losses. That means, depending on how close the mortgage amount is to the purchase price, some banks may reject the application. However, this does not mean that getting a high-ratio mortgage is impossible. If your down payment is less than 20 percent, you will have to purchase mortgage default insurance.

LTV Formula:

  1. Subtract your down payment amount from the property value to calculate your mortgage amount.
  2. Divide the mortgage amount by the value of the property.
  3. Multiply the result by 100 to get the desired percentage.
  4. If the LTV ratio is more than 80%, it will be considered a high ratio mortgage.

Here is an example. Imagine you want a $400,000 mortgage on a house worth $500,000. The formula will look like this:

($400,000 / $500,000) x 100 = 80%
The LTV of this mortgage is 80%.

How do I assess which mortgage is better for me?

Here is what happens when you make a high or low down payment for a property valued at $500,000.

  • 20% down payment
    In this scenario, you will have to pay $100,000 from your pocket, and the mortgage amount will be $400,000. The LTV ratio is 80 percent which makes it a low-ratio mortgage.
  • 10% down payment
    In this scenario, you will have to pay $50,000 from your pocket, and the mortgage amount will be $450,000. The LTV ratio is 90 percent which makes it a high-ratio mortgage.

How can I get a low ratio mortgage?

1. Start saving

We know that sometimes it is difficult to save a large sum of money every month. But, you can start with a small amount, for instance, $500-$600. You may have enough money for a down payment in 3-4 years.

2. House hunting

Sometimes you will have to pick a property that may not meet all your criteria. You can create a list of must-haves to help narrow down your options. You can also consider renovating the house using a Home Equity Line of Credit once you have built some equity.

What should you consider when getting a high ratio mortgage?

Here are some of the key factors you should consider before making a decision.

1. Mortgage Default Insurance

One of the main differences between a low and high ratio mortgage is that you will have to get mortgage default insurance for a high-ratio mortgage. The good thing about the insurance is that you don’t have to pay a hefty amount upfront. You can add the amount to your monthly payments. On average, it can cost anywhere between 2 and 4 percent of your mortgage value. The final rate will depend on the LTV ratio.

2. Amortization period

The amortization period of your mortgage is the time it will take you to pay it off completely. The period is determined based on your down payment and LTV. If you have an insured mortgage, your amortization period can be up to 25 years.

3. Lower interest rates

One great advantage of a high-ratio mortgage is that you can access low-interest rates. When you purchase mortgage insurance, the lender is protected, and in return, they can offer you low-interest rates.

Mortgage Maestro has access to over 50 lending institutions and can help find you the best interest rates.