For many first-time home buyers in Burlington, Oakville, and across the GTA, saving a 20% down payment can feel like a daunting task. Fortunately, Canada’s mortgage system allows buyers to purchase a home with less than 20% down through a high-ratio mortgage.
But what exactly is a CMHC high-ratio mortgage, and is it the right choice for you?
What Is a High-Ratio Mortgage?
A high-ratio mortgage is a mortgage where the buyer’s down payment is less than 20% of the home’s purchase price. Because the buyer is borrowing more than 80% of the property’s value, mortgage default insurance is required.
In Canada:
- High-ratio mortgage: Down payment under 20%
- Conventional mortgage: Down payment of 20% or more
The term “high ratio” refers to the loan-to-value ratio (LTV). When the mortgage exceeds 80% of the property’s value, the loan is considered high ratio.
What Is CMHC Mortgage Insurance?
CMHC mortgage insurance, also known as mortgage default insurance, protects the lender if a borrower is unable to make their mortgage payments. It is required when the down payment is less than 20% and the home meets eligibility requirements.
One important point that surprises many buyers:
CMHC insurance protects the lender—not the homeowner. However, it allows lenders to offer mortgages to buyers who have not yet saved a full 20% down payment.
How Much Down Payment Do You Need?
Current minimum down payment requirements are:
Homes Up to $500,000
- Minimum down payment: 5%
Homes Between $500,000 and $1,499,999
- 5% on the first $500,000
- 10% on the portion above $500,000
Homes $1.5 Million and Above
- Minimum 20% down payment
- Not eligible for insured mortgages
Example
Purchasing a home for $800,000:
- 5% of first $500,000 = $25,000
- 10% of remaining $300,000 = $30,000
- Minimum down payment = $55,000
Even though you’ve met the minimum down payment requirement, you would still need mortgage insurance because the down payment is less than 20%.
How Much Does CMHC Insurance Cost?
The premium is based primarily on your loan-to-value ratio. Generally, the smaller the down payment, the higher the insurance premium. Premiums can range from approximately 0.6% to 4.5% of the mortgage amount depending on the loan characteristics and down payment size.
Most buyers choose to add the premium directly to their mortgage instead of paying it upfront.
For example, a buyer with a smaller down payment may see their mortgage insurance premium added to the total mortgage balance and paid over the life of the loan.
Advantages of a High-Ratio Mortgage
Enter the Market Sooner
Instead of waiting years to save a 20% down payment, buyers can purchase a home with a smaller amount saved. This can be especially important in markets such as Oakville and Burlington where home prices have historically been higher than many other Ontario communities.
Build Equity Earlier
Buying sooner allows homeowners to begin paying down their mortgage and building equity rather than continuing to rent.
Competitive Mortgage Rates
Because insured mortgages carry less risk for lenders, buyers often qualify for competitive mortgage rates.
Disadvantages of a High-Ratio Mortgage
Insurance Premium Costs
The biggest drawback is the additional insurance premium, which increases the total amount borrowed.
Larger Monthly Payments
Since the premium is often added to the mortgage balance, monthly payments may be higher than they would be with a larger down payment.
Qualification Requirements
High-ratio borrowers must still qualify under mortgage stress test rules and meet lender requirements regarding income, debt service ratios, and creditworthiness.
Is a High-Ratio Mortgage Right for You?
The answer depends on your financial situation.
A high-ratio mortgage may make sense if:
- You have stable employment
- You have sufficient savings for the minimum down payment
- You want to enter the housing market sooner
- Home prices in your desired area are increasing faster than you can save
On the other hand, if you’re close to reaching a 20% down payment, waiting may reduce your borrowing costs and eliminate the need for mortgage insurance.
Final Thoughts
For many first-time buyers in Burlington and Oakville, a CMHC high-ratio mortgage is the tool that makes homeownership possible. While mortgage insurance adds cost, it also allows buyers to purchase a home with a smaller down payment and begin building equity sooner.
Before making a decision, it’s important to speak with an experienced mortgage professional who can explain your options and help determine whether a high-ratio or conventional mortgage is the better fit for your long-term goals.
Call or email me anytime
Dave Dulmage
Heritage Realty Inc.
Office 905-689-0011
Direct 905-407-3441
dave@heritagerealty.ca
@davedulmage
www.davedulmagerealestate.ca
