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.
