Hidden Costs of High Ratio Mortgage

Published on 29 August 2022, 07:22:56 AM

You saved enough for a high ratio mortgage, but now you’re wondering if it’s a safe bet. Be careful what you sign.

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

We run down the reasons whether it is better to get a high ratio mortgage, or stick with 20% or more down when you buy Canada real estate. 

When you’re ready to close on a real estate transaction, Axess Law’s real estate lawyer services handle the legal paperwork for you.

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.

Is using a second mortgage to renovate smart?

A high ratio mortgage is essential to buying a home when you have just enough to get your foot in the door. CMHC down payment rules (Canada Mortgage and Housing Corporation), and lenders like Canada Guaranty and Sagen (formerly Genworth), specialize in helping families and singles buy condos and homes they can afford.

Here’s how.

Put 5% to 15% Down

Minimum down payments for a high ratio mortgage are five per cent of the first $500,000, 10% for the balance up to $999,999, and 20% after that. Anything over 19.99% is a conventional mortgage. “Zero down” mortgages use borrowed money, instead of your own resources, to make a down payment.

When you buy a home in Ontario with five to 15 per cent down, high ratio lenders like CMHC insure your mortgage company against the risk you will go bankrupt or be unable to keep up the payments.

Mortgage loan insurance is a guarantee your lender is covered, regardless of what happens to your job or income in future. Mortgage lenders are more willing to deal with high ratio mortgage buyers when they know loan insurance will pay out the mortgage if you can’t.

Borrowing a down payment in Ontario.

The High Ratio Mortgage Formula

Lenders calculate your credit readiness for a mortgage by considering:

• the home price, to a maximum $1 million for insured mortgages
• minimum credit scores, at least 600 for one borrower or guarantor
• the down payment, 5% for a $500,000 home and 10% on the balance
• your gross debt service ratio (GDS) — how much you spend monthly for housing and related costs
• and your total debt service ratio (TDS) — which is all other debts, plus your housing and related costs.

Pass the stress test to get an Ontario mortgage.

Cost of Insured Mortgages in Ontario

Getting mortgage loan insurance comes at 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.

Tangerine.ca advises you can expect to pay $19,000 in loan insurance premiums if you put down the minimum 5% for a $500,000, 25-year mortgage. That declines to $13,950 with 10% down. You can save even more by paying the premium in cash, instead of adding it to your mortgage principal over the life of the loan.

When to get a private mortgage.

Tapping the federal First-Time Home Buyer Incentive or borrowing from your RRSP (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.

Why You Need a Real Estate Lawyer in Ontario

Axess Law real estate lawyers in Ottawa and Greater Toronto Area liaise with your mortgage default insurers to add them to title to your new property. We search property titles, and register your new home with the local land titles office.

Hire a real estate lawyer (Ontario).

Your Axess Law reviews agreements of purchase and sale real estate services draft for you for conditional clauses that can determine if a deal falls through, who keeps the deposit. We negotiate with the seller’s lawyer to amend your agreement if you need more time to finalize mortgage financing.

When home inspections turn up problems, we ask the seller’s lawyer to repair minor issues or reduce the price. We may even help you walk away if major defects like a faulty foundation are found.

Axess Law real estate lawyers handle all of the details from signing the paperwork to handing you the keys to the front door or lock box.

You can ask us anything.

Affordable Legal Services When You Need Them

Access lawyers for less in Greater Toronto Area, Ottawa, or anywhere in Ontario when you buy, sell, or transfer property. Axess Law’s flat fee real estate lawyers are affordable, and our rates are all inclusive (excluding taxes, disbursements, and third-party charges). Axess Law offers you only the legal services you absolutely need. Your final invoice includes no surprises or hidden charges. Your itemized statement of adjustments is explained when we deliver it, and we answer any questions you have about it.

Discharge mortgages when you buy or sell real estate.

Book Online or By Phone

E-sign documents in confidence when you use Axess Law virtual real estate lawyers. We can remote online with you via video conference call anywhere in Ontario. Your real estate closing is secure, confidential and convenient.

Visit our Ottawa and Greater Toronto Area Axess Law locations in person when you prefer to meet face to face. We’re open 7 days a week. Schedule day or evening appointments that fit your schedule.

Book a time online or by phone. It takes just minutes to confirm your appointment using our online booking form. For personal service, call our 647-479-0118 lawyer line or toll free to 877-522-9377 and tell us when you’re free.

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).

Get your GDS / TDS scores when you apply for a CMHC high ratio mortgage.