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High-Ratio vs. Low-Ratio Mortgage: Which is Right for You?
October 24, 2024 | Posted by: Tim Belanger
When it comes to securing a loan in Canada, it's crucial to understand the difference between a high ratio mortgage and a low ratio mortgage. These terms refer to the size of your down payment and how much of your home’s value is being financed. In this guide, we break down the difference between high ratio and low ratio mortgages, the implications of each and how they affect your mortgage terms and costs.
But first we need to know what a high ratio mortgage and low ratio mortage is.
What is a high ratio mortgage?
A high ratio loan is when your down payment is less than 20% of the purchase cost of the home. Because you're borrowing more than 80% of the home's value, lenders require you to pay for loan insurance to mitigate the higher risk. For an in-depth look at how high mortgage ratios work, try our guide on what a high ratio mortgage is?
What is a low ratio mortgage?
A low ratio mortgage (or conventionl mortgage) means your down payment is 20% or more of the home's value. In this case, loan coverage is not always required, reducing your overall costs. However, a larger down payment is necessary in advance.
High-Ratio vs. Low-Ratio Mortgage Comparison
The main difference between a high-ratio mortgage and a low-ratio mortgage is the size of the down payment. Let’s compare high ratio vs low ratio mortgage options in terms of other key factors like interest rates, insurance costs, and lender requirements to go deep into it.
1. Interest rates
High ratio mortgages usually lower interest rates slightly because they can be insured, reducing the lender's risk. When evaluated, low ratio mortgages may include slightly better costs, but without the added value of loan insurance.
2. Mortgage Insurance
With a high mortgage ratio, you'll need to pay for mortgage coverage, usually through CMHC, which can be added into your monthly payments. A low loan ratio no longer requires insurance that can save you thousands over the life of the loans.
3. Amortization impact
The amount you borrow in a high ratio loan can affect the length of the amortization and will undoubtedly extend it to keep monthly bills low. However, a low-ratio mortgage can allow for a shorter amortization period, meaning you'll pay off your mortgage faster and with a much lower average interest rate.
Creditor criteria and impact
In Canada, lenders look at high ratio and low ratio mortgages differently. A high ratio mortgage loan comes with stricter lender criteria because of the lower cost and better risk. Borrowers are usually required to go through a 'stress test' to make sure they can handle the increase in interest charge capacity over the years.
With low-ratio mortgages, lenders may have more flexibility in terms of approval for the reason that borrower’s equity in the home is higher, reducing the lender’s risk.
Which one is right for you?
Deciding between a high ratio and a low ratio mortgage depends on your financial situation. If you have a low down payment, a high ratio loan will allow you to enter the housing market more quickly. On the other hand, if you have at least 20% saved, a low ratio loan can save you money in the long run by saving on mortgage insurance premiums.
If you're not sure which option suits your needs, consulting with a mortgage agent nearby or contacting professionals from financial investment companies Canada will help you make an informed decision. In addition, it is essential to not forget the current mortgage rates in Ottawa to find the best deal for your situation.
Final Words: The right choice
Choosing between a high ratio vs. a low ratio mortgage comes down to balancing upfront costs with long-term financial savings. A high ratio mortgage may also offer a lower price but comes with an added cost of insurance, while a low ratio mortgage avoids these insurance costs but requires a higher down payment. No matter what you choose, information about the interest rates difference, the amortization impact and the criteria for lenders are paramount factors when making the right decision.
For more information on what fixed high ratio mortage is and how it works or to explore the best way to finance home renovations in Canada, contact the experts at Belanger Mortgages today.
FAQs
What is the qualifying rate for a high ratio mortgage?
The mortgage qualifying rate (MQR) is determined by taking the higher of two figures: a set minimum of 5.25% or your mortgage contract rate plus a 2% buffer. For example, if your contract rate is 4%, your MQR would be the greater of 4% + 2% (which equals 6%) or 5.25%. In this case, the qualifying rate would be 6%.
What is a good mortgage ratio?
Generally, a lower mortgage ratio is considered better. Lenders typically prefer a front-end ratio (housing costs) that does not exceed 28%, and a back-end ratio (total debt) no higher than 36%. These ratios help lenders determine the size of the mortgage loan and monthly payment that you can comfortably afford.
