Can’t believe how much houses cost these days? With prices climbing across Canada, saving for a traditional 20% down payment feels impossible for many. That’s why high-ratio mortgages are becoming so popular – they let you buy a home with less money up front. But here’s the kicker: these mortgages, where you actually pay less initially, often come with lower interest rates. Why?

This blog will break down high-ratio mortgages in Canada, explaining how they work, who’s eligible, and why those seemingly backwards interest rates exist.

What Is a High-Ratio Mortgage?

Essentially, a high-ratio mortgage means you’re putting down less than 20% on a property. This makes the loan itself a bigger chunk of the home’s value – that’s called the Loan-to-Value (LTV) ratio. If your LTV is over 80%, you need to get mortgage insurance from either the Canada Mortgage and Housing Corporation (CMHC), Sagen, or Canada Guaranty. If you are unable to make your payments, this insurance protects the lender, not you.

The opposite is true for a traditional mortgage. Mortgage insurance is not required for down payments of 20% or greater. The idea is simple: with a bigger down payment, you’re less likely to default, so the bank isn’t as worried.

Think saving a 20% down payment is a pipe dream? A high LTV mortgage in Canada could be your ticket to owning a home.

How High-Ratio Mortgages Work in Practice

Okay, let’s walk through getting a CMHC-insured mortgage, or one from Sagen or Canada Guaranty:

1. Lender Approval: First, you’ll chat with a lender – a bank, credit union, or mortgage broker. They’ll dig into your finances: credit history, income, debts, all that jazz. Knowing what they’re looking for is key. Our guide, Understanding the Mortgage Approval Process, is a good place to start. Expect them to check things like your debt-to-income ratio and confirm your employment, plus appraise the place you hope to buy.
2. Mortgage Insurer Approval: If you’re short on that 20% down payment, the lender sends your application to the insurance company (CMHC, Sagen, or Canada Guaranty). They double-check everything and decide how risky you are. Passing their “stress test” is crucial – that means proving you could still afford your payments if interest rates went up.
3. Insurance Premium Applied: If the insurer approves you, you’ll be charged a non-refundable insurance premium, and that amount depends on the size of your mortgage as a percentage. You should budget between 2.8% and 4% for the entire mortgage.
4. Premium Rolled Into Principal: The good news: you don’t have to pay the premium upfront. It gets added to your mortgage. The bad news: you’ll pay interest on that extra amount for the life of the loan.

Here’s an example: say you’re buying a $600,000 house and putting 10% down ($60,000). That means you need a $540,000 mortgage. If the insurance premium is 4%, that adds $21,600 to your loan. So, your total original mortgage amount becomes $561,600. And don’t forget, these fees don’t exclude you from first-time homebuyer programs and incentives.

Why Are High-Ratio Mortgage Rates Lower?

So, why are high-ratio mortgage rates usually lower than regular mortgage rates? It all comes down to risk, or more specifically, the lender’s reduced risk.

• Lender’s Risk Mitigated: Remember that mortgage insurance? It’s there to protect the bank if you default on your mortgage. If that happens, the insurance covers their losses. Basically, the insurer takes on some of the risk, allowing the lender to offer you a better rate.
• Government Backing: Since the Canadian government backs CMHC, loans are considered safer, driving down interest rates. Plus, Sagen and Canada Guaranty also have strict rules, making things safer, too.
• Competitive Market: The mortgage insurance world is pretty competitive. To get your business, lenders offer super-low rates to attract new customers and keep existing ones happy.

Here’s a quick comparison:

Keep in mind these rates are just examples. Real rates depend on the market, the lender, and your specific situation. Talk to a mortgage pro for personalized rates.

Role of High-Ratio Mortgage Insurance

Important: mortgage insurance from CMHC, Sagen, and Canada Guaranty protects the lender, not you. But it’s thanks to this insurance that you can buy a home with a smaller down payment.

The size of your down payment (the loan-to-value ratio) determines the cost of the insurance. A higher LTV and a higher premium are associated with a lesser down payment. This charge is added to your mortgage when you make a single payment. Also, heads up, some provinces charge sales tax on this premium.

Before you jump in, get your finances sorted. Our article, Steps to Take Before Applying for a Mortgage, has some great tips. Knowing your credit score, debt situation, and savings will make the process smoother.

Who Typically Uses High-Ratio Mortgages?

For a few important groups, high-ratio mortgages are an excellent choice:

• First-Time Homebuyers: These loans help those who are just beginning to save for a home to begin accumulating equity. Obtaining a mortgage with a little down payment allows you to move into your first house sooner.
• Younger Professionals: People don’t always have a lot of money saved up early in their professions. Even without a sizable down payment, anyone can purchase a property in Canada with a high-ratio mortgage.
• Buyers in High-Cost Areas: Saving 20% in cities like Toronto or Vancouver can take years. Sometimes, a smaller down payment is the only way to get into the market, especially when renting in these areas is nearly as expensive as paying a mortgage.
• Those Utilizing Incentives: People needing money up front could qualify for incentive programs. Reading up on first-time homebuyer programs and incentives is essential.

If you’re in any of these situations, take your credit score seriously! Learn How to Improve Your Credit Score for a Mortgage. You can save a lot of money on interest with even a minor improvement.

Pros of High-Ratio Mortgages

• Faster Homeownership: Skip waiting years to save a massive down payment and get into the market sooner rather than later. That’s especially valuable for eager young professionals seeking a way to make headway in a coveted urban location.
• Competitive Rates: Access lower interest rates. The money saved can really add up over the life of the loan.
• Preserve Cash: Keep your savings for moving costs, renovations, emergencies, or investments. It’s always wise to have a bit of breathing room to shield from unexpected expenses or give yourself breathing room.
• Insured Protection (for the Lender): The lender feels more secure. This security translates to a smoother mortgage process.

Thinking about a fixed or variable rate? Figuring out if fluctuating rates might lead to financial difficulties? Our breakdown on fixed-rate vs. variable-rate mortgages can ease your fears.

Cons of High-Ratio Mortgages

• Insurance Premium: That 2.8%–4% insurance premium adds to the overall cost of your mortgage, raising costs in the long term.
• Price Cap: You generally can’t get a high-ratio mortgage for homes priced at $1,000,000 or more. For homes valued at $1.5 million or more, a minimum 20% down payment is always required.
• Restrictions: These products aren’t for investment or rental properties but residential properties only.
• Reduced Borrowing Capacity: The premium might slightly reduce how much you can borrow in total.

It’s equally important to balance the advantages and disadvantages. Our blog post on Avoiding Common Mortgage Mistakes can provide you with clarity.

High Ratio vs. Conventional Mortgages: Side-by-Side

The essential differences in these loans can be seen in the side-by-side below:

How to Qualify for a High Ratio Mortgage

To get a high ratio mortgage, you need to meet the standards set by the insurer and the lender, which require:

• Credit Score: A good credit score is a must, and while you can get approved with 600+, you should try to get 680 for a sure thing.
• Verifiable Income: A steady, stable employment helps and is definitely a must, proving you can handle your mortgage payments and your debts.
• GDS/TDS Ratios: Meeting limits for Gross Debt Service (GDS) and Total Debt Service (TDS) ratios sets the percentage of your income allocated to housing and all debts.
• Purchase Price: The price cannot exceed $1 million.

Be prepared for “stress testing” – they’ll see if you can still afford your payments if rates go up. Getting pre-approved helps to give you a clear financial picture. Look at your credit scores and learn how they influence you: The Impact of Credit Scores on Mortgage Rates.

Final Thoughts: Is a High Ratio Mortgage Right for You?

A high ratio mortgage can open doors to homeownership, just keep in mind that it may not be right for everyone. While these loans may seem cheaper at first glance, the costs associated with having them can be higher in the long term. Choose a high-ratio mortgage when:

• You have under 20% for a down payment.
• You want to buy a home sooner rather than waiting to save more.
• You prefer to keep more savings liquid for other uses.
• You can still get competitive interest rates, as the insurance reduces lender risk.

But most importantly, if in doubt, seek help from qualified mortgage experts in understanding and determining if a high-interest loan makes sense for you.