What is a High-Ratio Mortgage?
What You Should Know
- A high-ratio mortgage is when you make a down payment of less than 20%.
- High-ratio mortgages require CMHC insurance, which is only possible for homes with a price of $1 million or less.
- Since they are insured, high-ratio mortgage rates are often lower than conventional low-ratio ones.
What is a High-Ratio Mortgage?
High-ratio mortgages allow you to purchase a home with a down payment as little as 5%. A high-ratio mortgage is a mortgage for more than 80% of the value of the home. If you are buying a home and you make a down payment of less than 20%, then your mortgage will be a high-ratio mortgage.
On the other hand, a low-ratio mortgage, also known as a conventional mortgage, is for less than 80% of the value of the home. To be a low-ratio mortgage, a down payment greater than 20% is required.
A high-ratio mortgage means that you are borrowing more money compared to a low-ratio mortgage. This means that high-ratio mortgages are riskier for mortgage lenders. To make up for this, mortgage loan insurance is required for high-ratio mortgages from most mortgage lenders, such as banks and credit unions.
High-Ratio Mortgages and Loan-to-Value Ratios
Your mortgage’s loan-to-value ratio (LTV) is the amount that you are borrowing compared to the purchase price or appraised value of the home. For example, if you make a 10% down payment on a home, your mortgage’s LTV ratio will be 90%. Likewise, if you make a 20% down payment, your LTV ratio is 80%.
LTV Ratio Calculation
If your mortgage’s LTV ratio is greater than 80%, then it is a high-ratio mortgage. The minimum required down payment in Canada is 5% for homes with a price less than $500,000. If you make a 5% down payment, then you will have the maximum allowed LTV ratio of 95%.
Table of Loan-to-Value Ratios for High-Ratio Mortgages
| Down Payment | Loan-to-Value (LTV) Ratio |
|---|---|
| 5% | 95% |
| 10% | 90% |
| 15% | 85% |
| 19.9% | 80.1% |
High-Ratio Mortgages vs. Conventional Mortgages
Mortgage loan insurance is required for high-ratio mortgages, but they are not required for conventional mortgages in Canada. Mortgage insurance is offered by the Canada Mortgage Housing Corporation (CMHC) as well as other private insurers. CMHC mortgage insurance is not free. You will need to pay CMHC mortgage insurance premiums based on your mortgage’s loan-to-value ratio.
High-Ratio and Conventional Mortgage Comparison
| High-Ratio Mortgage | Conventional Mortgage | |
|---|---|---|
| CMHC Insurance | Required | Not Required |
| Maximum Amortization Period | 25 Years | 40 Years |
| Mortgage Rates | Lower | Higher |
| Maximum Home Price | $1,000,000 | No Limit |
Insurance Premiums
You will need to pay for CMHC insurance on high-ratio mortgages. This is in the form of an insurance premium that is charged as a percentage of your borrowing amount.
CMHC insurance is only available for properties with a purchase price or value under $1,000,000. This means that you cannot use a high-ratio mortgage if you are planning on purchasing a home that has a price greater than $1,000,000. Instead, to purchase a home that costs more than $1 million, you will need to make a down payment of 20% or more for a conventional mortgage.
Calculate your CMHC Insurance PremiumsAmortization Period
The maximum amortization period allowed for high-ratio mortgages is 25 years, except for first-time home buyers of newly built homes, which can have an amortization of up to 30 years. If you would like a longer amortization period, then you would need to use a conventional mortgage. A longer amortization period allows for your mortgage payments to be spread out over a longer time period, resulting in smaller monthly mortgage payments. While the amount of your mortgage payments will be smaller, you will need to pay a larger down payment upfront in order to qualify for a conventional mortgage. A longer amortization period also means that you will be paying more interest over the lifetime of your loan.
Mortgage Rates
High-ratio mortgages are insured mortgages. Insured mortgages usually have lower mortgage rates than uninsured conventional mortgages. While you may be able to get lower mortgage rates with a high-ratio mortgage, you still have to pay for mortgage default insurance. However, in some cases, your mortgage interest savings may even outweigh the cost of mortgage insurance.
CMHC High-Ratio Mortgage
CMHC insurance premiums are paid by you, not your mortgage lender. You can add CMHC premiums onto your mortgage amount or you can pay it upfront.
CMHC premiums are calculated as a percentage of the total amount of your mortgage. The premium will vary depending on the LTV ratio of your mortgage, with the premium increasing for higher LTV ratios. You can use a CMHC insurance premium calculator to estimate the premium payable for your mortgage.
High-Ratio Mortgage Calculation
You can calculate using a mortgage payment calculator to see whether or not you will be paying more or less with a high-ratio or low-ratio mortgage.
For example, let’s consider a home with a $500,000 purchase price. Using rates as of August 2024, the best rate by CIBC for a 5-year fixed insured mortgage was 4.64%. The best rate by CIBC for a 5-year fixed insurable mortgage was 5.14%.
High-Ratio Mortgages
With a 5% down payment, your mortgage amount would be $475,000, making it a high-ratio mortgage. The CMHC insurance premium on the mortgage would be $19,000, which is added to the mortgage principal balance.
Using the lowest rate of 4.64%, with an amortization period of 25 years, your monthly payment would be $2,773. The total interest cost for the life of your high-ratio mortgage is $337,821, which includes interest on the CMHC insurance as it was added to the principal. Compared to the principal, lifetime interest paid will account for 71% of your mortgage principal.
Low-Ratio Mortgage
Let's consider the same scenario above but for an insurable low-ratio mortgage with a 20% down payment on a $500,000 home. Using a mortgage rate of 5.14%, your monthly payment would be $2,358, with no CMHC insurance premiums required. The total interest cost is $307,520, or 77% of the mortgage principal balance. An example that underscores the difference would be comparing a mortgage with a 20% down payment, as a low-ratio mortgage, with a 19.9% down payment for a high-ratio mortgage.
Is A High-Ratio Mortgage Cheaper than a Low-Ratio Mortgage?
The total interest paid over the lifetime of the mortgages as a proportion of the original mortgage principal amount in the above examples was 71% for a high-ratio mortgage and 77% for a low-ratio mortgage. A conventional low-ratio mortgage results in more interest paid compared to the principal, while a high-ratio mortgage has less interest paid. This is due to the lower interest rate found with high-ratio mortgages. What sets them apart is the total interest paid, with $337,821 in interest for a high-ratio mortgage and $307,520 in interest for a low-ratio mortgage.
The examples above assume that interest rates will remain the same for the entire 25-year life of the mortgage. However, mortgage rates change. Even with a fixed-rate mortgage, the term length is often 5 years or less, which means you will likely need to renew for future terms at a possibly different rate. The conventional mortgage also required a down payment of $75,000 larger than the high-ratio mortgage, for a total interest savings of only $30,301 over 25 years.
Interest Costs - High-Ratio vs Low Ratio
| High-Ratio (5%) | High-Ratio (10%) | High-Ratio (15%) | Low-Ratio (20%) | |
|---|---|---|---|---|
| 5-Year Fixed Interest Rate | 4.64% | 4.64% | 4.64% | 5.14% |
| Down Payment | $25,000 | $50,000 | $75,000 | $100,000 |
| Mortgage Principal | $475,000 | $450,000 | $425,000 | $400,000 |
| CMHC Premium | $19,000 | $13,950 | $11,900 | $0 |
| Monthly Payment | $2,773 | $2,604 | $2,452 | $2,358 |
| Total Interest Costs | $337,821 | $317,271 | $298,773 | $307,520 |
| Interest (% of Principal) | 71% | 70.5% | 70.3% | 77% |
| Total Cost (Principal, Interest, CMHC Premium, and Down Payment) | $856,821 | $831,221 | $810,673 | $807,520 |
Higher Required Down Payment
In the example above, the low-ratio mortgage required the highest down payment. If you can afford to make a large down payment, what if you opted to take a high-ratio mortgage instead and use the down payment saved to invest? The low-ratio mortgage had a down payment of $100,000. If you went for a high-ratio mortgage instead, with a $25,000 down payment, you would have $75,000 left over.
If you invested it at an annual interest rate of 2% compounded monthly, you would earn $48,602 on a $75,000 investment after 25 years. That’s more than the $41,192 in interest that you would have saved if you made a 20% down payment of $100,000. However, if mortgage rates increase over what you would otherwise earn from saving it, then a low-ratio mortgage would have a lower total cost.
Down Payment Savings - High-Ratio vs Low Ratio
| High-Ratio (5%) | High-Ratio (10%) | High-Ratio (15%) | Low-Ratio (20%) | |
|---|---|---|---|---|
| Mortgage Principal | $475,000 | $450,000 | $425,000 | $400,000 |
| Original Down Payment | $25,000 | $50,000 | $75,000 | $100,000 |
| New Down Payment | $25,000 | $25,000 | $25,000 | $25,000 |
| Down Payment Savings (vs 5% Down Payment) | $0 | $25,000 | $50,000 | $75,000 |
| Interest Rate | 2% | 2% | 2% | 2% |
| Total Interest Earned | $0 | $16,200 | $32,401 | $48,602 |
| Mortgage Interest Cost | $304,963 | $304,963 | $304,963 | $304,963 |
| Total Cost (Principal, Interest, and Down Payment less Interest Earnings) | $804,963 | $788,763 | $772,562 | $756,361 |
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
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