When you take out a mortgage in Canada, one of the main factors to consider is whether you would prefer a conventional or high-ratio mortgage.
But what exactly are conventional mortgages, and why might you want to get one?
Read on to find out everything you need to know about conventional mortgages in Canada, including what they are, the pros and cons, and how they compare with high-ratio mortgages.
- A conventional mortgage is one where the down payment you provide equals 20% or more of the purchase price.
- You do not need mortgage default insurance for a conventional mortgage because it is not considered a high-risk mortgage.
- These compare to high-ratio mortgages, where the down payment can be as little as 5% of the purchase price.
- Mortgage default insurance is required for high-ratio mortgages.
A conventional mortgage is a name given to a type of mortgage you can get from financial institutions in Canada.
The key factor determining whether a mortgage is conventional is the amount of the property’s purchase price that the loan covers.
The loan-to-value (LTV) ratio can be no more than 80% of the purchase price for a conventional mortgage. This means you must be able to pay the remaining 20% of the purchase price with the down payment.
Lenders can only offer a mortgage with an LTV ratio of over 80% in Canada if the loan is insured.
Conventional mortgages, on the other hand, are not required to be insured. So while lenders might still purchase insurance for conventional mortgages, they don’t have to.
Let’s say you want to buy a property valued at $300,000. You must provide a 20% down payment to get a conventional mortgage.
This would be equal to $60,000, so the size of the mortgage would be for the remaining $240,000.
In another case, let’s say you have a property valued at $450,000. You would pay a 20% down payment of $90,000 and get a conventional mortgage to cover the remaining $360,000.
A conventional mortgage is a mortgage where you must pay 20% or more of the property value. The loan value must therefore be equivalent to 80% of the property’s purchase price.
To qualify for a conventional loan in Canada, you must provide a down payment of 20% of the purchase price.
So, if the property you want to purchase is $350,000, your 20% down payment would be valued at $70,000.
You could start your house search by determining how much you could afford based on your down payment. For example, if you have $300,000 to use as a down payment, you could purchase a property with a maximum value of $1,500,000.
The down payment percentage on a conventional loan must be a minimum of 20%. However, it could be higher.
For example, you could provide a down payment of 30% if you wanted. This would reduce the mortgage amount and lead to smaller repayments.
What is a High-Ratio Mortgage in Canada?
What if you cannot afford the 20% down payment to get a conventional mortgage in Canada?
In this case, you would have to borrow more than 80% of the property’s value, which is called a high-ratio mortgage.
Essentially, a high-ratio mortgage has an LTV ratio of over 80%.
You could pay as little as a 5% down payment with a high-ratio mortgage, or you might pay 10%. But the value of the property must be less than $1,000,000.
For properties over $1 million, you must provide a 20% down payment.
High-ratio mortgages require you to pay for insurance. The lender will take out mortgage insurance from one of the three mortgage insurers in Canada:
- Canadian Mortgage and Housing Corporation (CMHC)
- Canada Guaranty
This is to protect the lender if you cannot pay your mortgage because high-ratio mortgages are riskier for banks. You will then pay for the insurance on top of your mortgage.
While you may be able to provide a down payment of less than 20% for your property, the amount you provide depends to a certain extent on the property’s value.
For example, you may want to provide a down payment of 5%. But this is only possible if the property’s value is below $500,000. Anything over $500,000 will require a down payment of 10% for that portion of the property.
For example, let’s say the property is valued at $700,000. In this case, your down payment would need to be equal to the following:
- 5% of the first $500,000
- 10% of the remaining $200,000
This gives us $25,000 + $20,000 for a total down payment of $45,000.
Is a conventional mortgage better than a high-ratio mortgage? That depends on your situation, and there are several key differences to remember.
Conventional mortgages require a higher down payment. If you have this, that’s fine. But if you don’t have a high down payment, you may need to get a high-ratio mortgage to buy the property you want.
With high-ratio mortgages, you are limited to properties below $1 million. Therefore, you cannot get a high-ratio mortgage for a property valued more than this.
One similarity with both types of mortgage is that your down payment must be from your own resources. You cannot borrow the funds for this.
Also, conventional mortgages do not require the lender to take out insurance, while high-ratio mortgages do. You must pay for this additional insurance on top of your mortgage payments.
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- One of the most important benefits of conventional mortgages is that you borrow less money to buy your property. As a result, your mortgage payments will normally be lower than a high-ratio mortgage with the same mortgage term.
- By providing a higher down payment, you might be able to purchase a more expensive property. For example, you will need a conventional mortgage to buy a property valued at $1 million or more.
- With a higher down payment, you should pay less interest on your loan over the mortgage term.
- You also won’t have to pay the insurance premiums that you would have to pay for a high-ratio mortgage.
- There are many conventional mortgages to choose from, including fixed-rate and variable-rate mortgages and various mortgage terms, giving you plenty of options.
- You will need to provide a 20% down payment for a conventional mortgage, which may not be possible depending on your financial situation.
Whether you should get a conventional mortgage depends on several factors, including your financial situation.
Do you have a large down payment saved up already? If you know the type of property you want to purchase and you have a 20% down payment, a conventional mortgage may be a good option.
You will need a conventional mortgage if you want to buy a property valued at over $1 million. There is no option to get a high-ratio mortgage in this case.
But just because you have a 20% down payment does not mean you should always get a conventional mortgage. You may find that you can get a better mortgage rate with an insured high-ratio mortgage.
The amount you borrow will impact your mortgage payments. If you borrow more, you will have to pay back more too.
But many variables are involved, including the mortgage term and whether it is a fixed-rate or variable-rate mortgage, and these can all impact the cost.
Consider all the factors, research the available mortgages, and choose the mortgage that is most suitable for your situation.
Conventional mortgages can be either fixed-rate or variable-rate mortgages.
There is no set mortgage rate for conventional mortgages in Canada. Different lenders will all provide different rates based on various factors, including the term and the type of mortgage.
Yes, a conventional mortgage is one where you will need to pay a minimum down payment of 20%. If your down payment is less than 20%, you will need a high-ratio mortgage instead.
Getting a conventional mortgage can be more of a challenge because of the need to provide a higher down payment of 20% or more. However, there are many mortgages to choose from in Canada, so search for the best mortgage for your needs.