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Conventional vs High-Ratio

Conventional vs
High-Ratio

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Introduction

This blog is a quick, to-the-point comparison that can help someone who is looking to buy a home, understand what type of implications there could be from the downpayment one might make. The difference between making a sizeable downpayment and the bare minimum can completely change your cashflow and what your finances look like.

Conventional

A conventional mortgage means putting 20% of your total purchase price as down payment. Meaning if the purchase price of home is $300,000 you would put down $60,000 to secure it. For first time homebuyers, that’s quite a chunk of change, and is more common with existing home owners who have existing equity to put down. The reason a conventional mortgage is most ideal and will save you money in the long run, is because you can avoid having to pay mortgage default insurance (Provided by CMHC, Canada Guaranty, or Genworth Financial Canada). However, due to recent rule changes, if you were to put 20% down, your interest rates are actually higher than someone who’s put 5% down. Not by a large amount (about 0.10%). Add insurance premiums, and your monthly payments, and payments as a high-ratio buyer are much higher.

High-ratio

High ratio is a term that relates to your overall loan to value ratio, being above 80%. If your home is $300,000 and you can secure it with $15,000, you pose a greater risk to the lender as your loan amount compared to the value of the home is higher. Depending on your down payment amount, determines how much of an insurance premium you will pay over the term. Greater the loan to value ratio (risk to lender), greater the insurance premium. For First time buyers, there is a Government incentive, allowing buyers to break their RRSP without incurring any fees or taxes. It must however, be paid back in 15 years.

My experience

I purchased my first home with exactly 5% down, as I needed all new furniture and money for closing costs. I was charged a 4% insurance premium to add to my monthly mortgage payments. What I did was I looked at a chart on CMHC’s website, which was who my lender chose to use, to see how much exactly I would be charged. For example, it would show that if your loan to value ratio is 90% (a 10% down payment), then the insurance premium will be X% of the mortgage amount. Once I figured this out, I thought I would rather put less down and use more of that money on furniture and closing costs, since the difference in payments were not substantial. In your case the extra $5000 could be the difference between an extra few hundred bucks per month or not! See the following link https://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/hopr/hopr_007.cfm

Conclusion

Ideally, putting a bigger dent before starting to accumulate interest on your mortgage, and avoiding insurance default premiums, is the most ideal. However, speaking with an expert, and determining what insurance payments might look like (reviewing the chart linked above etc.), will make the idea of home ownership that much less overwhelming.

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