Published: September 22, 2020 • Last updated: April 27, 2022 at 21:22 pm
What Is A High Ratio Mortgage?
A high ratio mortgage is where the borrower’s lump sum down payment is less than 20% of the property purchase price. Canada requires you to have insurance on a high ratio mortgage as they are higher risk. Three insurance companies offer mortgage default insurance: Canada Mortgage and Housing Corporation (CMHC), Genworth Canada and Canada Guaranty. Any one of these can provide you with high ratio mortgage insurance.
What is considered high ratio?
A borrower with less than a 20% down payment on a home’s mortgage is considered a high ratio mortgage application.
Why Does It Matter Whether a Mortgage Is High Ratio?
High ratio mortgages are a riskier proposition for mortgage lenders than a low ratio mortgage. This is because the larger down payment borrower (low ratio mortgage) has much more “skin in the game” and is less likely to ever default on their mortgage.
Is the default rate higher on a high ratio mortgage?
High ratio mortgages have a statistically higher probability that the borrower will default on their mortgage payments. As a result, the lender will be unable to recover the outstanding loan amount owed if they need to foreclose on the property.
For example, in a housing market where prices are falling, the property’s value is much more likely to fall below the mortgage value if it is a high ratio mortgage, which is especially true for loans with as little as 5-10% down payment. (When the high loan value exceeds the property value, this is known as an ‘underwater mortgage’).
This scenario is why high ratio mortgages must have ‘mortgage default insurance’ or MDI upfront, and a low ratio mortgage doesn’t. Any mortgage broker can walk you through this process.
What Is Mortgage Default Insurance (MDI)?
In Canada, every high ratio mortgage – that is, every mortgage with a down payment of less than 20% — is subject to mortgage default insurance.
MDI is different from most insurance you buy in that it doesn’t protect you – it protects the lender (your financial institution). This insurance is essential for market liquidity and for average people, especially first-time home buyers, to qualify for and get a mortgage. Many lenders would be reluctant to take on this higher risk if there was no insurance to protect them against borrower default. MDI is sometimes also referred to as high-ratio mortgage insurance.
When you think about what a 5% down payment means – that you’ve borrowed 19x the amount of money you had – you can see why lenders need protection from that risk.
The insurance premium for this mandatory insurance adds to your mortgage monthly payment. Using our calculator, you can figure out how much will get tacked on.
Click the image to use our mortgage insurance calculator:
Does It Matter Which Company Insures My Mortgage?
Yes, it does matter. The three mortgage insurers are not equivalent or interchangeable.
Each insurer has niche things they do differently from their competitors, which is far better for consumers than a pure oligopoly. (Where the products and services seem interchangeable – like buying gas for your car)
What is a CMHC high ratio mortgage?
In mid-2020, CMHC brought in new rules for mortgage qualification when you purchase a home, and they included three significant changes:
- You Cannot Borrow Any Part of Your Down Payment
If your mortgage is going to be insured by CMHC, you may not tap into loans, credit cards or lines of credit when putting together your down payment. However, this had minimal impact on the market as few buyers tapped into these programs.
- 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 applying for such mortgages are first-time buyers. First-time homebuyers 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.
CMHC temporarily changed their maximum debt service ratios at the time, but as of July 2021, all insurers use the same 39%/44% debt service ratio calculations once again.
There was a period of a year from mid 2020 till mid 2021 when CMHC were far more conservative. The other two MDI providers decided not to follow CMHC on these rule changes, making them a preferred choice for many borrowers whose credit scores were between 600 and 680.
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%
* This is a partial list – please refer to CMHC website
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 your mortgage payments usually include the insurance cost, the provincial taxes on that insurance premium are due separately upon closing the property if you live in Manitoba, Ontario, or Quebec. These taxes can be a real surprise at a time when money is already likely to be tight after closing costs. 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. Unfortunately, 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 a higher probability of default could get a lower interest rate, but absolutely yes, it will. So you have to ask yourself, why are high ratio mortgages cheaper?
The banks reserve the best and lowest mortgage rates for insured, hi-ratio mortgages. It seems paradoxical, I know, but the lenders have no risk and can be very aggressive. BECAUSE your mortgage is insured, protecting the lender against default, there is no risk in the equation. It doesn’t matter if you have a fixed or variable mortgage.
Finding out whether you need mortgage insurance (MDI)
You need Mortgage default insurance(MDI) if your down payment is less than 20%. You won’t be able to get an uninsured mortgage from any major bank in Canada if your down payment is less than 20%. This requirement is put in place by the Office of the Superintendent of Financial Institutions (OSFI), an agency of the federal government that regulates financial institutions such as banks and federal credit unions.
If you make a down payment of at least 20% or more, you probably do not need default insurance. However, your mortgage lender can still require you to get default insurance even if you make a higher down payment, such as purchasing in a remote location where it might be challenging to find a buyer.
Mortgage default insurance is not available if:
- Your purchase price is $1,000,000 or above, or
- Your maximum amortization period is longer than 25 years
You must make a down payment of 20% or higher to get a mortgage in these cases.
- How Will Borrowers Be Impacted By CMHC Tougher Canadian Mortgage Qualification Rules?
- Mortgages 101 — What You Need To Know Before Applying for a Mortgage
- Why Is My Mortgage Application Declined?
- Why You Need A Down Payment Strategy
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Frequently asked Questions about high ratio mortgages
For the home buyer, it is an opportunity to buy a home without an exceedingly large down payment. Everyone else must put down at least 20%, but if your income is sufficient, you will end up with a down payment from 5 to 10 % of the purchase price, provided the property you are buying costs less than one million dollars.
The maximum amount is $925,000 PLUS the MDI insurance premium. The reason is the maximum purchase price cannot exceed $999,999. And the minimum down payment for that is $75,000.
You can qualify for a CMHC mortgage if the property you are buying is not an investment property AND its purchase price is less than one million dollars. You will need stable employment and income and a decent credit history, and you must be able to prove the source of your down payment. High ratio mortgages ONLY apply to home purchases, not to mortgage refinances.
If you have an insured mortgage there are certain tax benefits you can claim and they accrue to you when filing your next tax return. Here is an article explaining the various incentives available to you.
A high ratio mortgage has a down payment of less than 20% of the property purchase price.
A low ratio mortgage has a down payment of more than 20% of the property purchase price.