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One of the essential metrics lenders use to measure their risk exposure for a mortgage loan is the loan-to-value (LTV) ratio. An LTV is simply the ratio of your mortgage loan to the value of your property. In Canada, this ratio (LTV) is classified as either High-Ratio or Low-Ratio (Conventional)
High-ratio mortgages are loans with loan-to-value ratios above 80 percent of the property value. Low-ratio mortgages have loan-to-value ratios of 80 percent and below the property value.
Lenders have established guidelines on how much loan they can offer you on your property value, credit score, down payment, and property type. This guide covers these high-ratio mortgage attributes and more. Let’s get started.
A high-ratio mortgage is a loan that makes up more than 80 percent of the property value. That translates to a down payment of less than 20 percent.
The proportion of the mortgage to the value of your property is also called the loan-to-value (LTV) ratio, an important metric used by mortgage lenders to assess the riskiness of the mortgage.
Increasing your down payment reduces the mortgage required to buy the property, thus reducing your loan-to-value ratio.
For example:
Say you are buying a $600,000 property, and your down payment amounts are indicated below. Your loan-to-value goes down as your down payment increases.
| High Ratio (5.83% Down) | High Ratio (8.33% Down) | High Ratio (11.67% Down) | High Ratio (15% Down) |
Property Value | $600,000 | $600,000 | $600,000 | $600,000 |
Down Payment | $35,000 | $50,000 | $70,000 | $90,000 |
Required Mortgage | $565,000 | $550,000 | $530,000 | $510,000 |
LTV Calculation | [$565,000 / $600,000] * 100 | [$550,000 / $600,000] * 100 | [$530,000 / $600,000] * 100 | [$510,000 / $600,000] * 100 |
LTV Ratio | 94.17% | 91.67% | 88.33% | 85.00% |
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A low-ratio mortgage is any mortgage with a loan-to-value ratio of 80 percent or lower.
Your equity portion in a low-ratio mortgage is at least 20 percent of the property value. Low-ratio mortgages sometimes are called conventional mortgages.
On the other hand, high-ratio mortgages are referred to as unconventional mortgages because they do not follow the standard 80 percent LTV rule.
In Canada, lenders cannot offer a mortgage of more than 80 percent of the property value without default insurance protection.
High Ratio vs Conventional Mortgages
| High Ratio Mortgage | Low-Ratio (Conventional) Mortgage |
Default Insurance | Required | Not Required |
Maximum Amortization Period | 25 Years | 30 Years |
Mortgage Rates | Lower because Default Insurance Protection | Higher because lenders are not insured against a default |
Maximum Home Price | $1,000,000 | No Limit |
As explained above, the minimum down payment for high-ratio mortgages is 5 percent for house prices up to $500,000.
For houses priced over $500,000, but less than $ 1 million, you need a minimum of 5 percent of the first $500,000 of the property value and 10 percent of the value above $500,0000.
High-ratio mortgages are not offered for houses priced at $ 1 million and over.
You will have to qualify under the 20 percent conventional mortgage down payment rule to buy a house priced at $1 million.
Default mortgage insurance, commonly referred to as CMHC mortgage insurance, is a type of insurance policy that helps you buy a house with less than a 20 percent down payment.
In Canada, mortgage default insurance is a requirement for all high-ratio mortgages. This insurance protects mortgage lenders when you fail to pay as agreed or otherwise default on your mortgage.
Because lenders have this insurance protection, they are willing to take the risk to offer you a mortgage at such a high loan-to-value ratio.
These insurance policies come with a premium. Depending on your loan-to-value ratio, the default insurance premium rate ranges from 2.1 percent to 4 percent of the loan amount.
The default insurance premium is part of your mortgage closing costs but does not require payment upfront.
The premium is usually added to the mortgage loan amount and paid over as part of your regular mortgage loan. You also can choose to pay it off in one lump sum.
The mortgage amortization period will directly affect your regular mortgage payment amount.
The longer your amortization period, the lower your mortgage payment will be. And the shorter your amortization, the higher your mortgage payment.
Mortgage amortization is simply the length of time needed to pay off the entire loan amount. Lenders have less flexibility with how long to amortize your mortgage loan when going for a high-ratio mortgage.
The maximum amortization period for high-ratio mortgages is twenty-five years.
On the other hand, your low-ratio mortgage can be amortized for thirty years, thirty-five years and even forty years.
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In mortgage financing, debt service ratios measure your capacity to make the required mortgage loan payments. There are two types of debt services ratios – Gross Debt Service (GDS) Ratio and Total Debt Service (TDS) Ratio.
The Gross Debt Service (GDS) ratio is one of the mortgage qualification ratios used to assess the proportion of your income needed to cover the housing debt (the mortgage principal, mortgage interest, property tax, utility costs, and possibly the condo fee). The lower your GDS ratio, the better.
A lower GDS ratio indicates that less of your income is necessary to pay your housing costs, thus leaving you with enough buffer to withstand any unforeseen financial shock.
Conversely, a higher GDS ratio indicates that more of your income pays your housing costs. A high GDS also shows a high likelihood of default because you have less cushion in your monthly income to withstand any unforeseen financial shock.
The standard GDS ratio for high-ratio mortgages is 35 percent. With a good credit score of over 680, your lender may reach a 39 percent GDS ratio.
Total Debt Service (TDS) is another qualification or debt service ratio used to determine your capacity to make the required mortgage payment. Unlike the above GDS ratio, the TDS ratio also will consider payments for your debts, such as credit cards, student loans, and auto loans.
The lower your TDS ratio, the better.
You are less risky with a lower TDS ratio because it indicates you have enough left after paying your housing expenses and personal debt obligations. You still have enough money left over for any unforeseen financial responsibilities that may come up.
On the other hand, you are viewed as risky and highly likely to default on your mortgage loan with a high TDS ratio.
The high TDS ratio indicates you have limited funds left after you pay your mortgage, property tax, utilities, condo fee (if applicable) payments, and payment for your debts, with little money left over.
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