If you’re thinking of buying a home, did you know you can put as little as 5% down and qualify for a high-ratio mortgage? A high-ratio mortgage happens when you have a down payment of less than 20%, while a low-ratio mortgage is just the opposite.
Requirements of CMHC Mortgage Insurance
With high-ratio mortgages, buyers are required to pay mortgage insurance – which is a cost that ranges between 2.8% to 4% of your mortgage. Mortgage insurance, also known as CMHC insurance, protects the lender in the event that a buyer defaults on their mortgage payments. In Canada, mortgage insurance is only required if your down payment is between 5% and 19.99% on a home under $1 million.
There are certain restrictions in place to qualify for a high-ratio mortgage and mortgage insurance. These include:
- Purchase price is less than $1,000,000
- Mortgage loan insurance is not available for homes over $1 million because a down payment of 20% is required
- Down-payment cannot be borrowed
- The money you put toward your down payment must be your personal savings or received as a gift from family.
- Amortization period cannot surpass 25 years
- If you are looking for a longer-term mortgage than a high-ratio one is not for you.
Pros of high-ratio mortgages
A high-ratio mortgage has a few perks! It offers more people – namely first-time home buyers – the opportunity to enter the housing market without having a lot of money saved up for a down payment. High-ratio mortgages also have lower interest rates compared to conventional mortgages, which make for lower monthly mortgage payments that are easier to budget.
Cons of high-ratio mortgages
The major drawback of high-ratio mortgages is overall cost. You still need to purchase CMHC insurance and while you may get a lower interest rate, it can cost more in the long-run as you owe a larger sum of money. Further, your amortization period cannot be longer than 25 years so you should be prepared to pay off your mortgage during this period. Not everyone is willing to do this so be sure to assess your options before moving forward.
Buying a home is expensive and a high-ratio mortgage is one way to help Canadians get into the market a little easier. At Homewise, we can connect you with a lender who will provide you mortgage options that will lead you to your dream home – no matter the size of your down payment. Get started with a pre-approval today – all you have to do is apply online in 5 minutes!
