What is High Ratio? What is Conventional?

Simply put if a buyer is able to provide 20% or more for a down-payment, the mortgage is considered a “Conventional” mortgage.

When the mortgage has less then 20% down-payment, the mortgage is considered “High Ratio”.

The Canadian Federal Policy dictates that any mortgage that is deemed “high ratio”, the lender must insure the mortgage with “mortgage default insurance”.

Currently there are 3 mortgage default insurers in Canada. CMHC, which is a crown corporation; Genworth; and Canada Guaranty. (Some lenders actually self-insure their mortgages).

The Cost

Like all insurance, there is a one time premium associated with the purchase of the insurance which is to be paid by the borrower. The good news for the borrower is that it does not need to be paid all at once, but is added to the mortgage.

Each Insurer follow the same premium schedule, so the cost is consistent for each.

The cost of the premium has a few factors that are considered. The premium is based on a percentage rate of the mortgage, so as the mortgage amount increases, the premium will increase by the same amount.

Another major factor for the premium cost is the amount of down-payment (or equity) the borrower has in the property; the less down-payment/equity the premium amount will increase.

Other factors in the equation are: is the borrower self-employed; is the amortization period greater then 25 years; is it a “flex-down” product.
CMHC Premium Schedule
Genworth Premium Schedule
Canada Guaranty Premium Schedule – scroll to bottom of page.

The benefit

The primary benefit, is allowing easier homeownership. Without the default insurance, the lenders would evaluate this as a higher risk mortgage and adjust the interest rate accordingly, which will be significantly higher.

As we have seen in the past in major urban centers, the price of homes will actually increase faster then the ability to save a down-payment. With this insurance available, the buyer is still able to purchase a home with the same competitive rates as a conventional mortgage.

Another major benefit, is if the borrower finds themselves in a position of financial hardship, the insurer offers programs to the lenders to work with the borrower to them in their homes. (It is always best to inform the lender of a hardship situation, making it easier to find a solution).