Should you get a conventional or a high-ratio mortgage?
June 28, 2020

Should you get a conventional or a high-ratio mortgage?

One reason why many first-time homebuyers try to save at least 20 per cent for a down payment is that it marks the threshold between two types of mortgages: conventional and high-ratio. Here’s what you need to know about these mortgage types and how they affect your home-buying plan.

Conventional versus high-ratio mortgages

You can apply for a conventional mortgage when you have saved at least 20% of the purchase price for a down payment (plus another 1.5% - 3% for closing costs).

If you have between 5% and 19.99% for a down payment, you will need to apply for a high-ratio mortgage (also called an insured default mortgage) and pay for mortgage default insurance. You’ll also need to demonstrate your ability to cover closing costs (see note below) and your ability to make mortgage payments. To qualify for a mortgage you will require good credit scores, be able to meet the GDS/TDS ratio requirements, have reliable and steady employment, have a down payment, etc.

Mortgage typeMinimum down paymentMortgage default insurance neededMaximum home price

Conventional

20% or more

No

Max. purchase price is dependent upon the lender

High-ratio

5% - 19.99%

Yes

The cost of insurance can be paid up front or added to the amount of your mortgage.

$1-million

A quick note about closing costs:

In addition to your down payment, you need to set money aside for closing costs. Estimate 1.5-3% of the purchase price.

Closing costs are all the legal and administrative fees you are required or encouraged to pay before and after the transaction is completed. This includes land transfer tax, legal fees, title insurance, moving expenses, home inspection and essential home furnishings if you are buying your first home.

If you are applying for a high-ratio mortgage, you may need to demonstrate that you have enough money on hand to cover closing costs based on a percentage of the purchase price of your home.

With a high-ratio mortgage, you will pay a premium on insurance but the benefit is that you will likely be offered a better interest rate, and if you should decide to move your mortgage to a different lender, your insurance premium will come with you. Most first-time home buyers want to know if they would qualify for a mortgage and if so, for what amount. A Concentra mortgage specialist can answer your questions and recommend the best mortgage for your specific needs.

Your price range

If you have a down payment of more than 20%, and qualify for a conventional mortgage, you can shop for a broader selection of homes. But if you are applying for a high-ratio mortgage, your budget is based on what you can buy with as little as five per cent down. In addition, you need to have 10 per cent for a down payment on the cost of a home between $500,000 and $1 million. For example, you’ll need a minimum 5% down payment on homes valued up to $500,000 and an additional 10% on any amount between $500,000 and $999,999.

Price of the homeDown payment requiredInsurance premium if you buy with the minimum down payment1

Less than or equal to $500,000

Minimum 5%

Price: $500,000

Down payment: $25,000

Estimated insurance: $19,000

Between $500,000 and $1,000,000

5% on the first $500,000

+

10% on the remaining balance, up to $1,000,000

Price: $750,000

Down payment: $50,000

Estimated insurance: $28,000

We can help you determine the best way to put your down payment to use. For instance, you may be better off applying it to homes that let you qualify for a conventional mortgage to avoid paying insurance premiums.

Your long-term plans for homeownership

Buying a home is both an emotional and a financial decision. You’ll be putting down roots, building equity, and becoming part of a new community. A mortgage specialist can help you decide which type of mortgage is right for you based on your down payment and if the added cost of default insurance is the most affordable option.

If you would like to create your own home-buying road map, contact one of our Mobile Mortgage Specialists.

1 Assumes the buyer meets the minimum requirement for a down payment on a high-ratio mortgage at 3.0% amortized over 25 years. Actual amount may vary.

The content of this article is provided for general information purposes only. It is not intended to be specific advice regarding legal, accounting, financial, or tax matters on which you should rely. You must obtain more specific or professional advice before taking, or refraining from, any action or inaction on the basis of the content in this article. We accept no liability for any loss or damages arising out of your use or reliance of the information in this article, including liability towards third parties.

© Concentra Bank, 2020
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