High Ratio Mortgages vs Conventional Mortgages
Mortgages are loans that are used to finance the purchase of a home. The loan is secured by the home, which means that if you default on the loan, the lender can foreclose on the home. Mortgages are typically paid back over a period of 15 to 30 years, although some mortgages may have terms of up to 40 years.
The interest rate on a mortgage is typically lower than the interest rate on a credit card or personal loan, which makes it easier to qualify for and afford. Mortgage payments are also usually tax-deductible, which can save you money each year.
If you're thinking about buying a home, a mortgage could be a good option for you. Here's what you need to know about high ratio mortgages vs conventional mortgages.
What is a high ratio mortgage?
A high ratio mortgage is a mortgage that has a loan-to-value ratio (LTV) of more than 80%. This means that the loan amount is more than 80% of the value of the property. In other words, a high ratio mortgage is a loan in which you put less than 20% of the purchase price of the house you're buying down. The phrase "high ratio" refers to the difference between the mortgage amount and the purchase price, often known as the loan-to-value ratio. High ratio mortgages are usually insured by CMHC or Genworth or Canada Guaranty, which protects lenders in case of borrower default.
There are several benefits to getting a high ratio mortgage, including:
1. You can get into your home sooner: With a smaller down payment, you can get into your home sooner than if you had to come up with a larger down payment.
2. You can use your savings for other things: A high ratio mortgage frees up cash that you can use for other purposes, like furnishing your home or saving for unexpected expenses.
3. You may qualify for government incentives: In some cases, you may qualify for government programs and incentives designed to help first-time homebuyers achieve their homeownership goals.
Conventional (or Low Ratio mortgages)
Conventional Mortgages are those where you have a down payment of 20% or more.
The benefits of a Conventional Mortgage include:
1. You'll avoid paying CMHC insurance: If you have a down payment of 20% or more, you won't have to pay CMHC insurance. This can save you thousands of dollars over the life of your mortgage.
2. You may qualify for a lower interest rate: Because conventional mortgages are considered low-risk by lenders, you may qualify for a lower interest rate than you would with a high ratio mortgage.
3. You'll build equity faster: With a larger down payment, you'll start building equity in your home from day one. This can help you reach your financial goals sooner.
What are the risks of a high ratio mortgage?
The biggest risk of a high ratio mortgage is that you could end up owing more than your home is worth if the value of your home decreases. This is known as being "underwater" on your mortgage. If you can't make your payments and have to sell your home, you may not be able to sell it for enough to pay off your loan.
How to find the best high ratio mortgage lenders
If you're considering a high ratio mortgage, it's important to compare different lenders to find the best deal. Be sure to compare interest rates, fees, and the terms and conditions of each loan. It's also a good idea to talk to a mortgage broker who can help you compare different lenders and find the best deal for your situation.
Whether you have risk appetite or are risk averse, deciding on high ratio mortgage vs conventional mortgages well before you make a purchase can be a good option. Just be sure to compare different lenders and find the best deal for your situation. A mortgage broker like trusted Peel Mortgage Broker can also be a valuable resource in helping you decide.
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