Conventional Mortgage vs. High Ratio

Conventional Mortgage vs. High Ratio

There are some things you should know about a conventional mortgage vs. high ratio mortgages if you’re getting ready to buy a home.

First of all, you should always do all of your research into any mortgage that you’re going to get. If you think a conventional mortgage is your only option, then you haven’t done enough research. Even if you determine that a high ratio mortgage doesn’t make sense for you, it’s best to make that as an informed decision.

Basics of a Conventional Mortgage

A conventional mortgage is the type of home mortgage that you are probably already familiar with. In other words, it’s a loan to buy a home. However, for a conventional mortgage, you must also put down a down payment.

As a home buyer, you need to come up with at least 20% of the purchase price for that down payment. For example,  if you plan to buy a home for $500,000, then you need to come up with 20% of that, which is $100,000. Then you would get the mortgage for the remaining 80% or $400,000.

What is a High Ratio Mortgage?

What do you do if you are ready to buy a home but you can’t come up with 20% for a down payment? One option is to get a high ratio mortgage. This is a mortgage that is for more than 80% of the value of the home. In other words, you might still pay a down payment, but it’s for less than 20% of the purchase price of the home. In the above example, if your down payment is less than $100,000 then you might be looking into a high ratio mortgage.

Here are a few other things to know about a high ratio mortgage:

  • The home purchase is limited to $1,000,000 or less.
  • Amortization is capped at 25 years.
  • High ratio mortgages are a Canadian term; FHA loans in the USA are similar.

The Loan-to-Value Ratio

If you’re comparing a conventional mortgage vs. high ratio mortgage, then one of the terms you’re likely to see is the “loan-to-value ratio.” This is also called the LTV. The conventional mortgage is for an 80/20 LTV. As previously described, this means that you can borrow no more than 80% of the purchase price. The 20% down payment is up to you to come up with. A high ratio mortgage might have a different LTV, such as 90/10.

Conventional Mortgage vs. High Ratio Mortgage

If you can afford a conventional mortgage, then it’s typically the way to go. However, that doesn’t mean that it’s a negative thing to get a high ratio mortgage. You can choose either an adjustable rate or variable rate loan for either type of mortgage. If you can get a good interest rate, then you should be able to keep your monthly mortgage payments manageable with either type of loan.

Lenders require people with a high ratio mortgage to get mortgage insurance. Therefore, that’s one added cost to consider when you compare a conventional mortgage vs. high ratio. Furthermore, your insurance premium will be higher if you need more money. In other words, if you can make a down payment of 15% instead of 10%, then you can reduce your costs.

Additionally, high ratio mortgage loans are considered higher risk; therefore the interest rate that you can get might be higher than that of a conventional mortgage. As a result, if you choose a high ratio mortgage, then you should aim to lock in a low fixed interest rate on that loan.

Do you have any specific questions about conventional mortgage vs. high ratio that we haven’t answered here? Share in the comments.

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