Monday, February 4, 2013

Ontario Mortgage News– Types of Mortgages Part 4: High Ratio Mortgage vs. a Conventional Mortgage


Are you getting ready to buy a home and obtain mortgage financing? Knowing your options before jumping in is important. This is part 4 of a 4 part series that gives you important Ontario mortgage news and information about the various types of mortgages available in Ontario. Getting a mortgage does not have to be stressful, and knowing what mortgage types are available to you can help keep the search for your perfect home stress-free.
This final Ontario mortgage news blog will look at the high ratio mortgage and the conventional mortgage. First, what is a high ratio mortgage? A high ratio mortgage is a mortgage where the borrower puts down less than 20% of the total purchase price of a home as a down payment. In Ontario, a minimum 5% down payment is required on all home purchases, but you can put down as much as you like. However, if you put down less than 20% you have to get a high ratio mortgage.
So what does this mean? Well, having a high ratio mortgage means that it is necessary to purchase mortgage insurance, usually done by your lender. The premium for this insurance is usually calculated in as a closing cost, or can sometimes be financed through the mortgage.

Why do you need mortgage insurance with a high ratio mortgage? A high ratio mortgage necessitates the purchase of mortgage insurance because the lender is putting forth more risk and wants to protect their investment. If you are putting down less than 20%, there is a higher chance that the lender will not recoup those funds if you default, and therefore the insurance is there for their protection.
So what if you put down more than 20%? This is where a conventional mortgage comes in. Since you have placed what the lender considers to be a large enough down payment on a home, you can qualify for a conventional mortgage and are not required to buy mortgage insurance.

If you are putting down more than 20%, there is more immediate equity in your home and the lender acknowledges that you are less of a risk. Since there is less risk involved on the lender’s behalf, they will often provide much more favourable repayment terms and you may find rates a little more flexible.
So what are the benefits of these two types of mortgages? Simply put, if you want to open the range of properties you can have access to and are willing to put down less as far as a down payment, then a high ratio mortgage might make sense – or if you only have that 5% to put down then you are not prohibited from buying at all. However, if you want to feel more comfortable and put down a larger down payment and skip the mortgage insurance, then a conventional mortgage may be right for you. It all depends on your current and future needs and goals, so talk to your mortgage broker and see what they say.

For other Ontario mortgage news or for more information about high ratio mortgages and conventional mortgages, please contact Paul Mangion of The Mortgage Centre at 416-204-0156 or visit www.themortgagecentretoronto.com.