Buying a home in Canada is a significant milestone, but for many people, saving enough money for a 20% down payment can feel like an impossible goal. With rising real estate prices across the country, particularly in cities such as Toronto, Vancouver, and Calgary, it’s not uncommon for buyers to seek ways to enter the market with less cash upfront. That’s where a high-ratio mortgage comes in.
A high-ratio mortgage enables Canadians to purchase a home with as little as 5% down payment. It makes homeownership more accessible, especially for first-time buyers, but it also comes with additional requirements and costs. In this blog, we’ll cover everything you need to know: from down payments and loan-to-value ratios to qualifying rules, pros and cons, and whether this type of mortgage is right for you.
An Introduction to Down Payments
A down payment is the portion of the home’s purchase price you pay out of pocket. It represents your equity in the home from the very beginning.
In Canada, the minimum down payment depends on the home’s purchase price:
- 5% for homes priced at $500,000 or less
- 5% on the first $500,000, plus 10% on the portion between $500,000 and $999,999
- 20% for homes priced at $1 million or more
For example, if you’re buying a $700,000 home, your minimum down payment would be $45,000: 5% of the first $500,000 ($25,000) plus 10% of the remaining $200,000 ($20,000). Your down payment determines whether your mortgage is considered high-ratio (less than 20% down) or conventional (20% or more).
High and Low Ratio Mortgages Explained
A high-ratio mortgage means you’ve made a down payment of less than 20% of the purchase price. As a result, your mortgage loan covers more than 80% of the home’s value. A low-ratio (conventional) mortgage, on the other hand, requires a down payment of at least 20%, meaning the lender is financing 80% or less of the home’s price.
The most significant difference between the two is mortgage default insurance. With a high-ratio mortgage, insurance is mandatory because lenders want protection in the event of default on your loan. With a conventional mortgage, insurance is not required, which can save you thousands of dollars in costs.
High-Ratio Mortgages vs. Conventional Mortgages
To make it clear, here’s a side-by-side comparison:
| Feature | High-Ratio Mortgage | Conventional Mortgage |
| Down Payment | Less than 20% | 20% or more |
| Loan-to-Value (LTV) | Over 80% | 80% or less |
| Mortgage Insurance | Required (CMHC, Sagen, or Canada Guaranty) | Not required |
| Amortization Period | Maximum 25 years | Up to 30 years |
| Interest Rates | Often slightly lower | May be slightly higher |
| Overall Cost | Higher due to insurance premiums | Lower long-term cost |
High-Ratio Mortgage Calculation
Let’s look at a practical example:
- Home purchase price: $600,000
- Minimum down payment: $35,000 (5% of $500,000 = $25,000, plus 10% of $100,000 = $10,000)
- Mortgage amount: $565,000
- Loan-to-Value (LTV): 94% ($565,000 ÷ $600,000 × 100)
Since the down payment is under 20% and the LTV is above 80%, this qualifies as a high-ratio mortgage.
Loan-to-Value Ratio (LTV)
The Loan-to-Value Ratio is a calculation that compares the size of your mortgage loan to the value of the property. It’s the key measure that determines whether your mortgage is considered a high-ratio or conventional mortgage.
- Formula: Mortgage Amount ÷ Purchase Price × 100
- Example: $400,000 ÷ $500,000 = 80% LTV
An LTV above 80% indicates that your mortgage is a high-ratio mortgage and requires mortgage insurance. An LTV of 80% or lower qualifies as a conventional mortgage.
Qualifying for a High-Ratio Mortgage
Getting approved for a high-ratio mortgage isn’t just about the down payment. Lenders and mortgage insurers will also look at your overall financial situation. Key requirements include:
- Credit Score: Most lenders require a minimum score between 600 and 680, depending on the insurer.
- Income & Employment: You’ll need proof of stable income, such as pay stubs or tax returns. Self-employed buyers may need to provide additional documentation to support their application.
- Debt Service Ratios:
- Gross Debt Service (GDS): Housing costs (mortgage, property taxes, heat) can’t exceed 39% of your income.
- Total Debt Service (TDS): The total of all debts combined can’t exceed 44% of your income.
- Purchase Price Limit: High-ratio mortgages are not available for homes priced at $1 million or more.
- Amortization: Maximum 25 years, compared to up to 30 years for conventional mortgages.
Pros and Cons of a High-Ratio Mortgage
Pros
- Lower upfront requirement: Buy a home with as little as 5% down.
- Faster market entry: Get into the housing market sooner, even if you don’t have years of savings.
- Competitive rates: Lenders often offer slightly lower interest rates because the mortgage is insured.
Cons
- Insurance costs: You must pay mortgage default insurance, which adds thousands to your loan.
- Higher overall cost: Even with lower rates, the premiums increase your total repayment.
- Amortization limit: You’re capped at 25 years, which can make payments higher compared to a 30-year option.
- Price restrictions: Homes over $1 million don’t qualify, limiting your choices in expensive markets.
High-Ratio Fees and Costs
The main cost associated with a high-ratio mortgage is mortgage default insurance.
- Premiums are based on your loan-to-value ratio and typically range between 2.8% and 4% of your mortgage amount.
- Example: On a $500,000 mortgage with 5% down, your insurance premium could be around $19,000 to $20,000.
- Most buyers choose to roll this premium into their mortgage rather than paying up front, which means you’ll also pay interest on it.
While these costs can be significant, they also protect lenders, which is why insured mortgages often come with slightly better rates.
Is a High-Ratio Mortgage Right for You?
A high-ratio mortgage can be the right choice if:
- You’re a first-time buyer who can’t save 20% but wants to start building equity.
- You’re confident in your income stability and can handle the monthly payments.
- You want to buy sooner rather than later, even if it means higher long-term costs.
It may not be the right fit if:
- You can save up the complete 20% down payment in a reasonable time.
- You’re buying in a high-priced market where the $1 million cap restricts your choices.
- You want a longer amortization to lower your monthly payments.
What’s Next?
If you’re thinking about a high-ratio mortgage, here are some steps you can take:
- Review your budget: Look at your income, expenses, and savings.
- Use a mortgage calculator: Estimate monthly payments with and without insurance.
- Compare options: Different lenders and insurers may offer slightly different rates or requirements.
- Get expert advice: Consult with a licensed mortgage broker to find the best solution tailored to your needs.
Final Thoughts
A high-ratio mortgage makes homeownership possible for Canadians who don’t have a 20% down payment saved up. While it does come with added insurance costs and restrictions, it can be a smart option for first-time buyers who want to enter the housing market sooner. The decision ultimately comes down to your financial situation and goals. If you value getting into a home quickly and can manage the payments, a high-ratio mortgage may be a suitable option for you. If you’d rather avoid extra costs, saving up for a conventional mortgage may be worth the wait. Either way, understanding how high-ratio mortgages work will help you make a confident, informed decision about your future home.