The high ratio mortgage in Canada is a great way to get into your house sooner and begin building equity. It isn’t a loan you want to have through the entire amortization period, but the renewal process in Canada almost guarantees that you can get out of paying insurance after only part of your mortgage has been paid, if you are diligent about saving.
For many people looking to buy a house in Canada, the first place to look for a mortgage is with a traditional lender. Banks have long been the most common association with mortgage lending. However, there are three obstacles that stand between any potential borrower and mortgage approval: income verification, credit score and a down payment. Income verification simply means that you can show that you have a regular stream of income that is at a high enough level to pay for the mortgage. If you’ve been working at the same job, or at least in the same field, for several years, and your income has been reasonably stable, this generally isn’t a problem unless you’re applying for a mortgage that will cost you more per month than the accepted housing expense ratio (usually no more than 28 percent of your total income) or that will bring your debt to income ratio to a level that is too high (generally no more than 43 percent). Now if you just graduated from college and have only been in your current position for a matter of months, it could be more difficult, and if you’re self employed, banks can be pickier about income verification as well. Credit score is a calculation that credit bureaus make on the basis of your payment record. If you pay things like your car note and credit cards on time, and stay out of collections for other things such as utilities, then you will have a high credit score, and banks will see you as an acceptable risk. It is the third obstacle — the down payment — that is the focus of this article.
For a conventional loan, you need to have at least 20 percent of the purchase price to put down at closing. If you are looking at an $80,000 condo, this is only $16,000. If you’re looking at a $500,000 home, though, that is $100,000. If you haven’t had the ability to squirrel that much money away, it is unlikely that you will receive bank approval for a conventional mortgage. So what can you do? (high ratio mortgage definition)
High Ratio Mortgages in Canada
This is where the high ratio mortgage comes in. Many lenders will approve you for a loan with as little as 5 percent down, as long as your debt to income and housing expense ratios are still in acceptable ranges, and you can verify that income level. However, you also have to pay mortgage insurance. This is coverage that protects the bank if you end up having to default on the loan. You pay the premiums, but the bank gets the money if things end up going wrong for you financially. Remember that $300,000 house? Here’s how your mortgage amortization would work in both scenarios. Let’s say you put 5 percent down, or $15,000. Your mortgage would be $285,000, and a normal insurance fee would range between 1 and 3 1/2 percent of the principal. Let’s say 3.25 percent just to err on the high side; that brings your insurance fee to $9,262. You can pay this at closing, or you can roll it into your note. Even if we remove property taxes and take out utility costs, you’re looking at a monthly mortgage payment of $1,500 over a 25 year amortization with a rate of 3.7 percent. If you make the $60,000 down payment, with all other numbers the same, you’re looking at monthly payments of $1,223.72. Why is it less? You have no insurance to worry about, and you are financing less. You might think that $277 isn’t that much difference in a month. However, remember that a 25-year amortization involves 300 payments (25 years times 12 months). Over those 25 years, you will be paying $83,100 more for the same loan.
Conventional vs High ratio mortgage
You might be asking yourself why you would ever consider this. Remember that in Canada you have a great deal of flexibility when it comes to the term of your loan — anywhere up to 10 years before renewal. If you think you can qualify for a conventional loan within three years (and will have the down payment saved up by then), then ask for a five year term just to be safe. Then, come back and get a conventional loan at renewal.
Talk to one of our mortgage specialists at Amansad Financial today to see what will be best for your situation. We have helped connect many of our clients with high ratio mortgages that got them into the homes they wanted.
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