What is a Conventional Mortgage?
The term conventional mortgage refers to a mortgage that does not carry any form of high-ratio or lender insurance premium.
A conventional mortgage means your down payment is 20% or more of the property’s value. With a conventional mortgage, you don’t need to buy mortgage insurance.
What is a High-Ratio Mortgage?
The Bank Act of Canada requires that no chartered bank is able to offer mortgage financing without insurance beyond a certain percentage of the value of the property. This limit is 80 percent for most residential single-family mortgages.
A high-ratio mortgage means your down payment is less than 20% of the property’s value and your mortgage exceeds 80 percent of the property value. With a high-ratio mortgage, you will have to buy mortgage insurance from the Canada Mortgage Housing Corporation (CMHC), Canada Guaranty or Genworth Financial to protect the lender against loss if you fail to make your mortgage payments.
The price of the insurance premium is added directly to the mortgage amount, going on top as an insurance premium vs. being deducted like a lender fee in trust company or private mortgages.
By insuring a mortgage loan, Canadian banks are able to reduce the capital allocation required on a per dollar basis as a result of reduced capital requirements due to the insurance component.
High-Ratio vs Conventional Mortgages?
When you buy a new home, you need at least 5% of the property’s value for the down payment. The type of mortgage you qualify for is based on the amount of your down payment.
Your choice of high-ratio or conventional will depend on how much money you have for a down payment.