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High Ratio Mortgages and why they aren’t a bad thing

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Is a high ratio mortgage bad? Depending on your mortgage terms, a high ratio mortgage can cost more in the long term than a conventional loan. 

What is a High Ratio Mortgage?

Buying a new or first home is exhilarating — and intimidating. These days, even some modest-income home buyers and newcomers can afford to buy.

When you think of your financial future, owning a home is often at the top of the list. Like other investments, your home is not a sure thing. But it is an asset you can use the rest of your life or flip as your financial strategy evolves.

A high ratio mortgage is essential to buying a home when you have just enough to get your foot in the door. An insured mortgage gives borrowers a chance to get out of renting and into building their own equity.

Here’s how:

Put 5% to 19.99% Down

Did you know that the minimum down payments for a mortgage in Canada start at 5% of the first $500,000, and increase to 10% for the balance up to $999,999 – with 20% for anything beyond that? It’s important to be aware of these requirements when you’re considering buying a home.

In some cases, borrowers opt for “zero down” mortgages, which essentially means using borrowed money, rather than personal funds, to make the down payment. These types of mortgages are often referred to as “Flex Down.” We do have to debt service the borrowed funds, so don’t over leverage yourself.

When you choose to purchase a home in BC with a down payment between 5 -19.99%, high ratio lenders such as Sagen & CMHC offer mortgage insurance. This insurance provides protection for your lender against the risk of potential bankruptcy or your inability to meet mortgage payments. The insurance premium is added to your mortgage.

An insured mortgage provides a guarantee to lenders that they will be covered for the amount of the mortgage, in case of borrower default. Having mortgage insurance reassures lenders, and in turn they offer borrowers lower interest rates as an incentive.

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The High Ratio Mortgage Formula

  • tMaximum home price of $999,999.99
  • minimum credit scores of at least 600 for one borrower
  • the down payment, 5% for a $500,000 home and 10% on the balance
  • your gross debt service ratio (GDS)
  • and your total debt service ratio (TDS)

Cost of Insured Mortgages in BC

An insured mortgage does have a cost. Premium rates are based on a sliding scale, from 0.6% of the home price for a 19.99% down payment to 4.5% if you have 5% down.

You can expect to pay $19,000 in insurance premiums if you put down the minimum 5% for a $500,000, 25-year mortgage. That declines to $13,950 with 10% down.

Using the federal First-Time Home Buyer Incentive or using your RRSP’s (up to $35,000 for individuals or $70,000 for couples) can give you immediate cash to increase your down payment or buy more house.

Some Frequently Asked Questions

What is My GDS?

Your gross debt service (GDS) ratio is your mortgage principal, interest, property taxes, heating and lease costs, plus 50% of any condo fees. As of July 2021, your GDS cannot exceed 39% of your gross household income (CMHC high ratio rules).

What is My TDS?

Your total debt service ratio (TDS) is your GDS, plus all other monthly debts, divided by your gross household income. Your TDS must be 44% or less of gross household income to qualify for high ratio mortgage insurance (CMHC, July 2021).

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