High ratio mortgages. The term conjures up frightening images of high risk loans and unbearable levels of debt.
In reality, high ratio mortgages are pretty common these days. And with the price of housing, it is no wonder.
Housing Costs and Down Payments
High ratio mortgages are those that require homebuyers to borrow more than 80 of the money they need to pay for their home. This means that to avoid a high ratio mortgage, you need a down payment of more than 20 of the purchase price.
A quick look at the current Canadian housing market will demonstrate just how difficult it is to save for that down payment, especially for first time buyers.
If you live in a major city, you could spend anywhere between $242,000 (Montreal) and $566,000 (Vancouver) for a new home. A 20 down payment for a nice piece of Montreal real estate would set you back about $48,000. In Vancouver, you’d be looking at a down payment of just over $113,000. For that amount you could practically buy a house outright in Fredericton!
Given these costs, it’s no surprise that high ratio mortgages make up nearly half of the mortgages in Canada.
Mortgage Insurance
In Canada, homebuyers are required, by law, to purchase mortgage insurance when they have a down payment of less than 20 of the property’s selling price. CMHC and Genworth are the most commonly known mortgage insurers in this country.
If you are buying your home with less than 20 down, you must remember to factor in the costs of mortgage insurance. The cost calculations for mortgage insurance are pretty straightforward. The fee is a percentage of your loan, based on the size of your down payment. The bottom line? The more you borrow, the more you pay. For example, with CMHC, if you only require financing for 65 of the home’s cost, you will pay .5 of the loan amount. But if you require 95 financing, you will pay 2 of the loan amount in insurance fees.
Because they are insured, high ratio mortgages are usually subject to the same terms as conventional mortgages, so you can shop around for the best rates and terms. Be sure to ask your lender or mortgage broker about prepayment options too. If you want to increase your monthly payment or make a lump sum payment, you want to be able to do so without an extra penalty being charged.
What You Can Do With High Ratio Mortgages
Insured high ratio mortgages have helped many first time home buyers get into the real estate market. By reducing the down payment required for a new home purchase, home ownership has become a reality for people unable to save tens of thousands of dollars in advance of their purchase.
High ratio loans have also helped people looking for mortgage refinancing. Many financial institutions and lenders will fund 90 or more of the property’s value, allowing homeowners to borrow against the equity in their home for renovations and major life expenses.
To learn more about high ratio mortgages, contact a mortgage professional today.
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