What is a high ratio mortgage?

Key takeaways

If you’re buying your first home or are buying in an expensive market, you may consider buying with a smaller down payment.
A high-ratio mortgage is a loan with a down payment of less than 20% of a property’s purchase price.
High ratio mortgages allow you to enter the housing market earlier if you don’t have the full 20% down payment, but you’ll need to take out mortgage insurance, and there are other costs and considerations to think about.

An introduction to down payments

A down payment is the lump sum of money you initially put towards the purchase price of a home.

If you’re already a homeowner, you may choose to use some money from the sale of your current property towards the down payment on your next one. If you’re a first-time homebuyer, you’ll need to come up with this money yourself, from personal savings, a gift from family, or inheritance. Once you have the down payment together, your lender will subtract this sum from the purchase price of your home. What’s left is then covered by your mortgage, which you’ll pay off in monthly, bi-weekly or weekly installments.

The down payment is often the biggest upfront cost you’ll have when buying a home, and is separate from other closing costs.

How much do you need for a down payment?

You’ll need a minimum of 5%, and this figure could rise to 20% depending on the purchase price of your homeOpens a new website in a new window.

High and low ratio mortgages explained

A mortgage can be classified as either high ratio or low ratio using its loan-to-value (LTV) ratio.

The LTV is a type of risk assessment that lenders such as Canada Life will look at when reviewing a mortgage application. It’s calculated by dividing the amount borrowed by the purchase price, expressed as a percentage.

A high ratio mortgage is a mortgage with a down payment that’s less than 20% of the purchase price. This means it has an LTV ratio of more than 80%. A low ratio mortgage, also known as a “conventional” mortgage, has a down payment of 20% or more of the purchase price. This means it has an LTV ratio at or below 80%.

The higher the LTV, the riskier a mortgage is considered by the lender, which is why a high ratio mortgage requires mortgage default insurance.

Let’s look at an example. Jean and Angelique are buying their first home in Gatineau, Quebec. The property costs $330,000, and together, they’ve saved $66,000 towards their down payment, and have set the rest of their $75,000 savings aside for closing costs:

Property purchase price: $330,000
Jean and Angelique’s down payment: $66,000
Jean and Angelique’s mortgage: $264,000

As Jean and Angelique have an LTV of 80%, they have a low ratio mortgage.

Let’s take the same example, but this time, let’s say that our buyers have only saved $53,000, which means they had to make a smaller down payment:

Property purchase price: $330,000
Jean and Angelique’s down payment: $53,000
Jean and Angelique’s mortgage: $277,000

We can see that paying less upfront increases the mortgage amount, and that the LTV is now 84%. This means that Jean and Angelique now have a high ratio mortgage and will be required to purchase mortgage default insurance.

Let’s look at another example, this time in a more expensive market. Kelley and Miranda are buying their dream home in Port Hope, about an hour outside of Toronto. The home has a purchase price of $875,000. Kelley and Miranda are selling their current home, and will use the money from the sale to make a down payment of 25% on their new purchase:

Property purchase price: $875,000
Kelley and Miranda’s down payment: $218,750
Kelley and Miranda’ s mortgage: $656,250

We can see that the LTV is 75%, and so Kelley and Miranda have a low ratio mortgage.

First time buyers Sam and James are also interested in the same property. However, as they have no money from the sale of a home to put towards the down payment, they’re using savings to cover it. They’ve saved a total of $70,000; while this is a decent sum, it only amounts to a down payment of around 8% of the purchase price:

Property purchase price: $875,000
Sam and James down payment: $70,000
Sam and James mortgage: $805,000

In this scenario, Sam and James have an LTV of 92% and a high ratio mortgage. This means they’d be borrowing nearly all of the property’s purchase price, and will have large monthly mortgage payments as a result. In this instance, Sam and James may want to consider saving more for a larger down payment, or looking for a less expensive home.

High ratio fees and costs

To a lender, a high ratio mortgage can signal that you may be a higher risk buyer, and may be more likely to default on your mortgage loan. To protect lenders against this, buyers with less than a 20% down payment require mortgage default insurance, and this along with other costs can make high ratio mortgages a more expensive option over time.

Mortgage default insurance premiums

If you buy a home with a down payment that’s less than 20%, you’ll need to buy mortgage default insurance. This coverage protects the lender in case you’re no longer able to make your mortgage payments. It’s different from mortgage life insurance, which will pay off your mortgage in the event of your death.

You’ll pay a fee for this insurance, called a premium. This premium can amount to thousands of dollars, but instead of paying it upfront, this sum can be added to your mortgage and paid off over time. The amount you’ll pay depends on the amount of your down payment, but a good rule of thumb is the higher the LTV, the higher the premium. In Canada, mortgage insurance is available from 3 providers:

Higher monthly mortgage payments

The amount of your down payment is subtracted from the purchase price of the house. The less this down payment is, the larger your mortgage, which means your monthly mortgage payments can become more expensive.

Shorter amortization periods

An amortization period is the total length of time you have to pay off your mortgage in full. If you have a low ratio mortgage and no mortgage default insurance, the maximum amount of time you’ll have is 35 years. However, if you have an insured mortgage, this drops to 25 years. This means that on top of paying more each month, you’ll have a shorter time to do so, which can require more careful monthly budgeting.

Interest rates

One upside to having mortgage default insurance is that interest rates are generally lower for insured mortgages than non-insured. This is because the lender will receive a payout in the event you default on the mortgage. However, the money saved by the lower interest rate may be less than the premium you paid for the mortgage default insurance, so it’s important to weigh the pros and cons when looking at how this will impact your monthly expenses.

What's next?

To avoid a high ratio mortgage, you may want to look for ways to increase your down payment. This could mean restructuring your budget to save more, buying a home later, or using your Registered retirement savings plan (RRSP)Opens in a new windowas a down payment (if you’re a first-time buyerOpens in a new window).
If you’re unable to save more for a down payment, you could look at buying a less expensive property to avoid taking out a high ratio mortgage.
If you’re eligible, make use of first-time homebuyer grants and incentivesOpens in a new window to help with the cost of buying a property.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.