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What is a high-ratio mortgage?

A high-ratio mortgage refers to a mortgage in which the borrower has a down payment between 5% - 20%. These Mortgages require mortgage default insurance.

CMHC, Genworth Financial Canada, Canada Guaranty

The Canadian government supports high levels of homeownership through an insurance plan that covers lenders in the event that holders of high-ratio mortgages default on their mortgage.

In Canada, there are 3 main suppliers of insurance for high-ratio mortgages:

  1. CMHC. Canada Mortgage and Housing Corporation’s mortgage insurance program allows buyers who have as little as a 5% down payment to secure mortgages at the same rates as those who make a 20% down payment. The mortgage default insurance premium, which is passed on to the borrower, can either be paid up front as a lump sum or be added to the mortgage.
  2. Genworth Financial Canada is a private default insurance provider. As a leading private sector supplier of mortgage default insurance in Canada, Genworth works with lenders to make home ownership more accessible to Canadians.
  3. Canada Guaranty. Established in 2010, Canada Guaranty is a Canadian-owned private mortgage insurance company. Mortgage insurance from Canada Guaranty protects lenders and investors from losses related to borrower default and foreclosure.

The information in this article is general only; it is not intended as specific investment, financial, accounting, legal or tax advice for any individual.

Example:

How the mortgage default insurer calculates the mortgage default insurance premium:

Tina is considering buying a $200,000 home with a $35,000 down payment.  Tina’s down payment is 17.5% of the purchase price of the home.

            $35,000 ÷ $200,000 x 100 = 17.5%

Because Tina’s down payment is less than 20% of the purchase price, mortgage default insurance is required for her mortgage of $165,000.

In Tina’s case:

  • The mortgage default insurance premium will be added to the mortgage amount, rather than paid before closing
  • The mortgage default insurance premium rate is 1.75%
  • The mortgage will be amortized over 25 years
  • The mortgage interest rate is 5% compounded semi-annually

Therefore the mortgage default insurance premium is $165,000 x 1.75% = $2,888

The total mortgage amount will be $165,000 + $2,888 = $167,888

In the above example, the mortgage default insurance premium is $2,888 and is added to the principal amount of the mortgage.  Adding the premium to the mortgage increases the monthly payment from $960 to $976, and over the amortization period of 25 years, the mortgage default insurance will cost Tina an additional $2,150 in interest.  Tina can make arrangements to pay the premium before closing if she does not want the premium amount added to the mortgage amount.

Premiums in Ontario are subject to provincial sales tax.  The provincial sales tax cannot be added to the mortgage amount and the borrower must pay the applicable provincial sales tax.

For additional information on CMHC, Genworth or Canada Guaranty, please visit:

www.cmhc.ca

www.genworth.ca

www.canadaguaranty.ca

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