Published: September 22, 2020 • Last updated: January 6, 2021 at 6:17 am
What Is A High Ratio Mortgage?
A high ratio mortgage is where the borrower’s down payment is less than 20% of the property purchase price.
Why Does It Matter Whether a Mortgage Is High Ratio?
High ratio mortgages have a statistically higher probability both that the borrower will default on their mortgage payments, and that the lender will be unable to recover the outstanding loan balance owed if they need to foreclose on the property.
For example, in a housing market where prices are falling, the value of the property is much more likely to fall below the value of the mortgage if it is high ratio, and this is especially true for loans with as little as 5-10% down payment. (When the loan value exceeds the property value, this is known as an ‘underwater mortgage’).
This is why high ratio mortgages are required to have ‘mortgage default insurance’ or MDI.
What Is Mortgage Default Insurance?
In Canada, every high ratio mortgage – that is, every mortgage with a down payment of less than 20% — is subject to mortgage default insurance. There are three companies that offer mortgage default insurance: Canada Mortgage and Housing Corporation (CMHC), Genworth Canada and Canada Guaranty, and any one these could be insuring your mortgage.
MDI is different from most insurance you buy, in that it doesn’t protect you – it protects the lender (your financial institution). This is important for market liquidity and for average people, especially first time home buyers, to be able to qualify for and get a mortgage, since many lenders would be reluctant to take on this risk if there was no insurance to protect them against borrower default. This is sometimes also referred to as high-ratio mortgage insurance.
When you think about what a 5% down payment actually means – that you’ve borrowed 19x the amount of money you had – you can see why lenders need to be protected from that sort of risk.
The insurance premium for this mandatory insurance is added on to your mortgage. You can figure out how much will get tacked on by using our calculator.
Does It Matter Which Company Insures My Mortgage?
Yes, it actually does matter. The three mortgage insurers are not equivalent or interchangeable.
Each insurer has niche things they do differently from their competitors, and this is actually far better for consumers than a pure oligopoly. (Where the products and services seem interchangeable – like buying gas for your car)
For example, in mid 2020, CMHC brought in new rules for mortgage qualification when you purchase a home and they included 3 significant changes:
- You Cannot Borrow Any Part of Your Down Payment
If your mortgage is going to be insured by CMHC, then you may not tap into loans, credit cards or lines of credit when putting together your down payment. This had minimal impact on the market as very few buyers tap into these programs currently.
- Minimum Credit Score For CMHC Mortgage Insurance Rose From 600 to 680
High ratio mortgages where the down payment is less than 20% of the purchase price are required to have mortgage insurance. Most often, homebuyers who are applying for such mortgages are first time buyers. More than ever, first time home buyers need to pay attention to their credit management skills and maintain good credit hygiene to ensure their credit score stays safely above this significantly higher threshold.
- Borrowing Power Decreased From 9% to 11%
All mortgage lenders currently adhere to lending guidelines stating no more than 39% of your gross income can be required to pay your mortgage payment, property taxes, heating and half your condo maintenance fees. This number is known as your Gross Debt Service Ratio. (GDS) Effective July 01, 2020 that GDS percentage dropped to 35% with CMHC, while remaining at 39% elsewhere.
The other two MDI providers decided not to follow CMHC on these rule changes, which made them a preferred choice for many borrowers that needed a higher debt service ratio to qualify for a larger mortgage, or whose credit scores were between 600 and 680.
- How Will Borrowers Be Impacted By CMHC’s Tougher Canadian Mortgage Qualification Rules?
What Does Mortgage Default Insurance Cost?
The MDI premium is primarily based on what percentage of the purchase price you put down. All three mortgage insurers offer the same premium levels. Here is the current table of CMHC insurance premiums
Insurance Premiums At Different Loan To Value Ratios
|Loan To Value*|
80.01% up to and including 85%
85.01% up to and including 90%
90.01% up to and including 95%
Note, if you are self-employed you may be charged insurance even on a conventional mortgage that is not high ratio.
Is The Mortgage Insurance Premium Subject to PST?
While the insurance cost itself is usually rolled into your mortgage payments, if you live in Manitoba, Ontario, or Quebec, the provincial taxes on that insurance premium are due separately upon closing the property. This can be a real surprise at a time when money is already likely to be tight. For example, if you purchase a home for $500,000 and make a 10% down payment, a $14,000 insurance premium will be added to your mortgage. Then, if you live in Ontario where PST is 8%, a further $1,120 will be due before you get the keys to your new home.
Are There Any Government Incentives If I Pay an MDI Premium?
A 10% premium refund may be available when CMHC Mortgage Loan Insurance is used to finance an Energy-Efficient Home. All three mortgage insurers have such programs. Many home buyers are unaware of this and fail to make a claim.
Will My Mortgage Get Lower Interest Rates If It Is Hi-Ratio?
It’s surprising to many people that a mortgage with higher probability of default could get a lower interest rate, but absolutely yes it will.
The best and lowest mortgage rates are always reserved for insured, hi-ratio mortgages. Seems paradoxical I know, but the reason is the lenders have no risk and can be very aggressive. The risk has been taken out of the equation BECAUSE your mortgage will be insured, protecting the lender against default.