05 Jul Conventional vs High-ratio mortgage
Have you ever heard these two terms? Do you know the difference between them? As we have stressed time and again on our blog posts, the most important aspect when it comes to mortgages is to be informed and to know all the different terms and conditions that are attached to this simple, yet complex, process called a mortgage.
First, the definitions. A conventional mortgage is a loan for up to 80% of the appraised value or purchase price of a property. A high-ratio mortgage is a mortgage in which a borrower places a down payment of less than 20% of the purchase price on a property.
In a conventional mortgage setting, you get the loan for no more than 80% of the purchase price and the remaining amount required for a purchase, comes from your resources and is referred to as the down payment. In this setting, there are some advantages for the buyer, since he/she is making a larger down payment on the property, which in turn will give more immediate equity in the property. Due to the fact that the risk to the lender is not as great as it would be in a lower down payment scenario, there are many options available, depending on the lender, such as a Home Equity Line of Credit. (This is the topic of another blog). Conventional mortgages do not often require mortgage insurance, although we strongly recommend you get one. (See our post on insurance).
If, on the other hand, you borrow more than 80% of the money you need, you will be applying for what is called a high-ratio mortgage. This type of mortgage must be insured by the Canada Mortgage and Housing Corporation, also known as CMHC, Genworth Financial or Canada Guarantee. This insurance is required by law in Canada to insure lenders against default on mortgages with less than 20% equity. The cost of the premium is added on to the mortgage and amortized (see post on amortization) over the length of the mortgage.
Mortgage qualifying rules contain an existing stress test for high ratio mortgages, where clients have to qualify at the current Bank of Canada benchmark rate. Conventional mortgages will also incorporate a stress test when qualifying, using the higher of either the 5 year benchmark rate or the original contract rate plus two percentage points.
Remember: if you are considering a home purchase, The Costa Group is happy to discuss your options and the best possible mortgage to meet your specific needs and numbers.