When it comes to mortgages, conventional wisdom is
often still the best advice.
If you can afford to make a down payment of 25 percent
without sentencing yourself to living like a monk for the next 25
years, you'll be suitably rewarded with low interest rates.
But that advice dates back to the 1950s, when the
average selling price of a home in Canada hovered around $13,000.
Trying to save a 25 percent down payment today, when the average
national selling price is $217,298 and still climbing, according
to the latest figures from the Canadian
Real Estate Association, is a much trickier feat.
That's why many home buyers choose to forego years
of monastic living just to save enough for a conventional mortgage
and opt to get into the housing market sooner with a high-ratio
As its name suggests, a high-ratio mortgage is one
in which the loan-value to home-value ratio is higher than in traditional
Unlike a conventional mortgage, for which buyers have
to put down 25 percent, a high-ratio mortgage lets buyers put down
as little as 5 percent of the purchase price.
For Toronto buyers, who live in a city in which the
Canadian Real Estate Association says the average home sold for
$301,612 in November 2003, it means the difference between a down
payment of $15,081 and $75,403.
High ratio means high level
Besides lowering the savings requirement of home-buying,
high-ratio mortgages also provide buyers with greater flexibility.
Even if you have enough cash socked away to make a down payment
of 10, 15 or even 25 percent, high-ratio mortgages mean you don't
have to break the bank if you don't want to.
That was an important factor for Jason Graham, 31,
a freelance art director whose film credits include "X-Men"
and "Bollywood Hollywood." When he said farewell to renting
in February 2002 and bought his first home, a one-bedroom condominium
in downtown Toronto, he chose to make a down payment of 5 percent,
even though he had the resources to put down almost twice that amount.
"I could have completely depleted my RRSP and
made a bigger down payment, but I would much rather that money stay
in my RRSP, just in case," says Graham, who, at the time, was
nearing the end of a job contract. "Being in the world of freelance,
you're never really sure where your money will come from."
Even though he started a new contract shortly after
moving in, Graham says he was still glad to have the extra money
at his disposal, since it enabled him to make renovations on his
condo, including installing hardwood laminate floors and painting.
How it works
With conventional mortgages of 75 percent or less, lenders
insure the loans themselves, says Cara MacKillop, mortgage development
manager at VanCity, Canada's second-largest credit union, in Vancouver.
But the less money buyers put down, the greater risk lenders assume.
"If anything drastic happens, like a job loss,
there's more of a risk than if you had put 25 percent down, because
you don't have as vested an interest in the property," explains
So, to protect themselves against the increased risk,
lenders require buyers with down payments of less than 25 percent
to buy default insurance from a third party.
This insurance is the key to high-ratio mortgages.
Without it, few major lenders will let you put down less than the
standard 25 percent. Unlike life or accident insurance, when you
buy mortgage insurance, you are paying to protect your lender's
interests, not your own.
Although your mortgage broker or bank loan officer
will take care of the details, it's good to understand how it works.
In Canada, mortgage insurance is offered by two organizations.
Mortgage and Housing Corporation is an agency created by the
federal government agency in 1946 to help meet the housing needs
of World War I veterans. Today, it is dedicated to helping all Canadians
buy quality, affordable housing.
The other insurer, GE
Mortgage Insurance Canada, is the domestic arm of the largest
mortgage insurer in the world and the only private-sector supplier
Who can qualify
Until the late '90s, only first-time home buyers purchasing
properties worth $250,000 or less could qualify for CMHC mortgage
insurance and be eligible for a high-ratio mortgage. Since then,
MacKillop says CMHC has changed its eligibility requirements, removing
the cap on housing prices and extending eligibility to all qualified
"The whole mentality is to help people get into
homes sooner," she says. "Everyone should put down 25
percent. But realistically, a lot of people can't, so you have to
decide if it's worth it to pay the premium and get into the market
sooner, and start paying your mortgage instead of someone else's."
Today, both the CMHC and GE use similar qualification
guidelines. As with any type of mortgage, a good credit rating and
two or more years of job stability are essential. Here are other
requirements to keep in mind:
- The home you're buying must be your principal residence and
located in Canada. So, summer cottages on the Bay of Fundy and
time-shares in Florida don't qualify.
- You need a down payment of at least 5 percent of the purchase
price (or 7.5 percent for a two-unit property in which you will
occupy one of the units). Borrowing money from your RRSP through
Customs and Revenue Agency's Home Buyers' Plan or using a
cash gift from an immediate relative are acceptable if you don't
have the required cash on hand.
- In addition to your down payment, you also need to prove you
can pay closing costs equivalent to 1.5 percent of your new home's
- Your home-related expenses, or gross debt service, must not
exceed 32 percent of your gross monthly household income. Home-related
expenses include monthly mortgage payments, property taxes, heating
costs and condo fees.
- Similarly, your total monthly debt load can't exceed 40 percent
of your gross monthly household income. Debts include your monthly
mortgage payments plus any personal loans, car loans and credit
What it costs
Mortgage insurance has two components. The first is an underwriting
fee of between $75 and $185 that varies according to the complexity
of your mortgage.
The second is a one-time insurance premium that can
either be added to your mortgage and paid off as part of the loan
or paid in a lump sum. Generally, it costs between 0.5 percent and
3.25 percent of your mortgage's value.
Exactly how much the premium costs varies according
to the size of your mortgage and the type of interest rate. Generally
speaking, the costs are the same with CMHC or GE. Below are the
general premium fees the two organizations charge on fixed-rate
or capped variable-rate mortgages:
Size of mortgage
(as a percentage of total property value)
premium (as a percentage of mortgage value)
Up to and including 65 percent
65.01 to 75 percent
75.01 to 80 percent
80.01 to 85 percent
85.01 to 90 percent
90.01 to 95 percent
To determine how much insurance costs, multiply the
amount of your mortgage by the corresponding premium listed above.
For example, if you bought a $180,000 home with 5 percent down ($9,000),
the insurance on your mortgage of $171,000 at a premium of 3.25
percent would be $5,558.
Having a high-ratio mortgage does mean you'll incur
the extra cost of default insurance, which might otherwise be used
to buy a bigger home. But many home buyers, especially young people
or first-timers, say it's worth it to get into the housing market
early and start building equity in their own home.
Bruce Gillespie is a freelance
writer and editor in Simcoe, Ontario.