When you’re looking to buy a home in Canada, one of the most important decisions you’ll face is how much money to put down as a down payment. If your down payment is less than 20% of the property’s purchase price, you’ll be taking on what’s known as a high-ratio mortgage. This type of mortgage can be a powerful tool for getting into the housing market sooner—but it comes with some unique requirements and trade-offs.
In this article, we’ll explore what a high-ratio mortgage is, how it works, the benefits and drawbacks, and how it compares to a conventional mortgage. Whether you’re a first-time buyer or exploring your options, understanding high-ratio financing is key to making an informed decision.
What Is a High-Ratio Mortgage?
That means the buyer is borrowing more than 80% of the home’s value. For example, if you’re buying a $500,000 home and only putting down 5% ($25,000), you’re financing $475,000. This puts your loan-to-value ratio (LTV) at 95%, which is firmly in high-ratio territory.
Canadian regulations require all high-ratio mortgages to be insured by a government-approved mortgage default insurer.
Mortgage Insurance Requirements
This insurance protects the lender—not the borrower—in case the mortgage goes into default. There are three major mortgage insurers in Canada: Canada Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth Canada), and Canada Guaranty.
When you apply for a mortgage and your down payment is less than 20% of your purchase price, your lender will insure your mortgage with one of these providers.
The cost of this insurance varies depending on your down payment amount. The smaller your down payment, the higher the insurance premium. For example, if your down payment is only 5%, your premium could be as high as 4.00% of the loan amount. A 10% down payment would lower the premium to 3.10% with an additional .20% added if the mortgage has a 30-year amortization. These premiums are typically added to your mortgage rather than paid upfront.
Key Characteristics of High-Ratio Mortgages
There are a few distinct features that set high-ratio mortgages apart from conventional loans:
Loan-to-Value (LTV) over 80%: The defining feature of a high-ratio mortgage is an LTV higher than 80%. That means you’re financing more than four-fifths of your home’s value.
Mandatory Mortgage Insurance: All high-ratio mortgages require default insurance through CMHC or a similar provider.
Premiums Added to Mortgage: Insurance premiums are calculated as a percentage of the mortgage and are not required to be paid upfront.
Minimum Down Payment Rules Apply: You can buy a home with as little as 5% down (for homes up to $500,000), 10% for the portion above that, and a hard cap of $1.5 million—above which high-ratio mortgages are not allowed.
Pros of High-Ratio Mortgages
Despite the added insurance cost, high-ratio mortgages offer several compelling benefits—especially for first-time buyers. Here are some of the key advantages that make this type of financing an attractive option for many Canadians.
1. Buy a Home with Less Money Upfront
One of the biggest advantages of a high-ratio mortgage is accessibility. With the minimum required down payment as low as 5%, these mortgages open the door to homeownership for many Canadians who might not otherwise have enough saved for a 20% down payment. For a $500,000 home, that’s just $25,000 upfront instead of $100,000.
This is especially helpful for first-time buyers and those living in high-cost urban areas, where home prices can climb faster than savings accounts.
2. Access to Better Interest Rates
While it may seem counterintuitive, high-ratio mortgages often come with lower interest rates than conventional mortgages. Why? Because the mortgage is insured, which alleviates the lender’s risk.This rate advantage can partially offset the cost of the insurance premium over time.
3. Start Building Equity Sooner
Buying a home with a smaller down payment allows you to enter the real estate market earlier. Even if you haven’t reached the 20% savings milestone, owning means you’re no longer paying rent. Every mortgage payment contributes to your home equity, which can grow further if your home’s value appreciates.
Rather than waiting years to save up 20%, a high-ratio mortgage lets you invest in your future now.
Cons of High-Ratio Mortgages
While high-ratio mortgages make homeownership more accessible, they also come with financial trade-offs. It’s important to understand the potential downsides before deciding if this type of mortgage is right for you.
1. Mortgage Insurance Premiums Add to Your Loan
The most immediate downside of a high-ratio mortgage is the added cost of the insurance premium. For example, borrowing $475,000 with a 4.00% premium results in an additional $19,000 which is added to your mortgage and you will therefore be borrowing $494,000.
As you can see, you don’t have to pay the premium upfront, but it does increase your monthly payments and the amount of interest you pay over time.
2. Higher Long-Term Costs
Because you’re borrowing more,the total cost of your mortgage over its lifetime will be higher than with a conventional mortgage.
It’s essential to run the numbers with your mortgage broker or advisor to fully understand the lifetime cost of your mortgage.
High-Ratio vs. Conventional Mortgage
A conventional mortgage is the opposite of a high-ratio mortgage. With a 20% or higher down payment ,your loan covers 80% or less of the home’s value,making it lower risk and exempt from mortgage insurance.While this saves on insurance costs, it requires significantly more upfront savings which can delay home ownership.
For example, if you’re buying a $500,000 home with a 20% down payment ($100,000), your loan amount is $400,000, which is 80% of the purchase price. This is a conventional mortgage, and no mortgage insurance would be required.
Is a High-Ratio Mortgage Right for You?
Whether you’re leaning toward a high ratio or conventional mortgage,the right choice depends on your personal finances, goals. Consulting with a qualified mortgage professional can help you assess your options, understand the impact of insurance premiums and choose the strategy that aligns with your long-term homeownership plan.
