What Is A High Ratio Mortgage?
A high ratio mortgage is where the borrower’s down payment is less than 20% of the property’s purchase price. In Canada, such mortgages require insurance because they are considered higher risk and necessitate “default insurance” coverage.
The 3 mortgage insurance providers, who offer mortgage default insurance in Canada are,
- Canada Mortgage and Housing Corporation (CMHC),
- Sagen (formerly, Genworth Canada), and
- Canada Guaranty.
What Qualifies As A High Ratio Mortgage?
A mortgage is deemed high ratio when the borrower’s down payment is less than 20% of the property’s value, otherwise referred to as 80%+ Loan-to-Value (LTV).
What Qualifies As A Low Ratio Mortgage?
A mortgage is deemed low ratio or “Conventional” when the borrower’s down payment exceeds 20% of the property’s value, otherwise referred to as 0.00%-79.99% Loan-to-Value (LTV).
Why Does It Matter If A Mortgage Is High Ratio?
High ratio mortgages pose a higher risk for lenders compared to low ratio mortgages. A larger down payment signifies greater financial commitment from the borrower, reducing the likelihood of default.
Is The Default Rate Higher On High Ratio Mortgages?
Statistics indicate that high ratio mortgages have a higher probability of default, particularly during market downturns. In scenarios where property values fall below the mortgage amount, known as an “underwater mortgage,” the lender may face challenges recovering the outstanding loan through foreclosure.
What Is Mortgage Default Insurance (MDI)?
Every high ratio mortgage in Canada, where the down payment is less than 20%, requires mortgage default insurance.
Unlike typical insurance protecting the borrower, MDI safeguards the lender against the risk of borrower default, ensuring market liquidity and facilitating mortgage qualification for average individuals, particularly first-time homebuyers.
Does The Mortgage Insurer Choice Matter?
Yes, it does. The 3 insurers, CMHC, Sagen, and Canada Guaranty, offer distinct features, providing homebuyers and owners with options that are not interchangeable.
What Are CMHC’s High Ratio Mortgage Rules?
CMHC implemented new rules in 2020, prohibiting borrowers from using loans, credit cards, or lines of credit for their down payment. The minimum credit score requirement for CMHC mortgage insurance increased from 600 to 680 during this period. While CMHC temporarily adjusted debt service ratios, all insurers reverted to the same calculations by July 2021.
What Does Mortgage Default Insurance Cost?
The MDI premium is primarily based on the percentage of the purchase price and the percentage of the borrowers down payment. The premium rates for different loan-to-value ratios are set by each insurer and must be considered when calculating the overall cost of the mortgage.
Are There Government Incentives For Paying An MDI Premium?
Homebuyers may be eligible for a 10% premium refund when using CMHC Mortgage Loan Insurance to finance an energy-efficient home. Similar programs are available through other insurers.
Will A High Ratio Mortgage Receive Lower Interest Rates?
Surprisingly, yes. Lenders offer lower interest rates for insured high ratio mortgages, as they carry no risk due to insurance coverage. This unique dynamic allows lenders to be more competitive in their rate offerings.
Determining The Need For Mortgage Default Insurance
If your down payment is less than 20%, MDI is mandatory, and major Canadian banks won’t provide an uninsured mortgage. However, even with a higher down payment, lenders may still require MDI, especially in remote locations.
MDI is not available if the purchase price exceeds $1,000,000 or the maximum amortization period exceeds 25 years. In such cases, a down payment of 20% or more is necessary to secure a mortgage.