What Is A High-Ratio Mortgage?
When a mortgage exceeds 75% of the purchase price of a property, it is called a "high-ratio" mortgage and requires that the borrower purchase insurance to protect the lending institution from default. This insurance is provided by the Canada Mortgage and Housing Corporation (CMHC).
The CMHC insurance premium on a high-ratio mortgage is calculated on a sliding scale, based on the percentage of the purchase price that will be mortgaged, as follows:
| Percentage |
|
Premium |
| Up to & including 80% |
|
1.00% |
| Up to & including 85% |
|
1.75% |
| Up to & including 90% |
|
2.00% |
| Up to & including 95% |
|
2.75% |
The mortgage insurance premium is a one-time fee that can either be added to the mortgage or paid separately upon closing.
5% Down Payment
By providing mortgage loan insurance to lending institutions, CMHC limits the lender’s risk, enabling the lender to finance up to 95% of the purchase price of a home. This means you can buy a property with as little as 5% of the purchase price as a down payment. Prospective homeowners must meet the following criteria:
- the property must be located in Canada and considered your principal residence
- you must have a down payment of at least 5% of the purchase price of the property (7.5%
for two-unit properties, or can be 5% if owner occupying 1 unit)
- your home-related expenses must not exceed 32% of your gross household income
- your total monthly debt load must not exceed 40% of your gross monthly household income
- you must be able to pay closing costs equivalent to at least 1.5% of the purchase price.
Note: there is no ceiling for 95% financing in Peterborough.
High-Ratio Mortgage Vs Conventional Mortgage
As the comparison below shows, a high-ratio mortgage results in higher monthly payments than a conventional mortgage because of the lower down payment (and the CMHC insurance premium if included in the mortgage principal). However, a high-ratio mortgage makes home ownership a possibility for many people because the down payment is much more affordable.
|
High-Ratio Mortgage
With 5% Down
| Purchase Price |
$200,000 |
| Down Payment |
$10,000 |
| Balance |
$190,000 |
| CHMC Insurance Premium |
$7,125 |
| Mortgage |
$197,125 |
| Monthly payment |
$1379.88 P&I |
|
Conventional Mortgage
With 25% Down
| Purchase Price |
$200,000 |
| Down Payment |
$50,000 |
| Balance |
$150,000 |
| CHMC Insurance Premium |
NONE |
| Mortgage |
$150,000 |
| Monthly Payment |
$1,050.00 P&I |
|
Both examples assume a first mortgage approved at a rate of 7%. In high-ratio example, the CMHC insurance premium has been added to the mortgage principal.
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