“Closed” and “high-ratio” describe two different parts of the same mortgage. Closed refers to restrictions on paying the mortgage ahead of schedule, while high-ratio refers to how much you borrow compared with the property’s value. A closed high-ratio mortgage is a mortgage with a loan-to-value ratio above 80%, usually because the buyer has a down payment below 20%, combined with a closed mortgage contract that limits penalty-free prepayments. High-ratio mortgages generally require mortgage loan insurance in Canada.
- What Makes a Mortgage High-Ratio?
- Why Does a High-Ratio Mortgage Need Mortgage Insurance?
- What Makes the High-Ratio Mortgage Closed?
- How the Down Payment Changes the Mortgage
- Does a Closed High-Ratio Mortgage Have a Maximum Amortization?
- What to Check Before Taking a Closed High-Ratio Mortgage
- Questions About Closed High-Ratio Mortgages
What Makes a Mortgage High-Ratio?
A mortgage is considered high-ratio when the mortgage loan exceeds 80% of the property’s lending value. In a typical home purchase, this happens when your down payment is less than 20%.
For example, putting $40,000 down on a $400,000 home leaves a $360,000 mortgage before any insurance premium is added. You are borrowing 90% of the purchase price, making it a high-ratio mortgage.
The minimum down payment itself depends on the purchase price. For a home costing $500,000 or less, the current minimum is 5%. From $500,000 to $1.5 million, the minimum is 5% of the first $500,000 plus 10% of the portion above $500,000. Homes priced at $1.5 million or more require at least 20% down. Canada’s current minimum down payment requirements
This differs from a conventional mortgage in Canada, where the mortgage generally does not exceed 80% of the property’s lending value.
Why Does a High-Ratio Mortgage Need Mortgage Insurance?
A high-ratio mortgage generally requires mortgage loan insurance because the borrower is financing a larger percentage of the property. The insurance protects the lender if the borrower defaults. It does not insure the borrower against being unable to make mortgage payments.
Mortgage loan insurance can allow an eligible buyer to finance up to 95% of a home’s purchase price. CMHC mortgage loan insurance explains how this permits a smaller down payment while reducing the lender’s exposure to a default.
The borrower ultimately bears the insurance premium. The premium can generally be paid upfront or added to the mortgage principal, although adding it to the mortgage means paying interest on that amount as well. Current CMHC premiums vary according to the loan-to-value ratio. CMHC’s current mortgage insurance premium table lists rates from 0.60% to 4.50%, depending on the mortgage and down payment structure.
Mortgage loan insurance should not be confused with optional mortgage life insurance. Mortgage loan insurance protects the lender against default, whereas mortgage life insurance is a separate optional product.
What Makes the High-Ratio Mortgage Closed?
The closed portion determines how freely you can repay the mortgage before its term expires.
A closed mortgage may provide prepayment privileges that allow you to increase regular payments or make lump-sum payments up to specified limits. Going beyond the amount permitted by the contract can result in a prepayment penalty.
This means mortgage insurance does not make the mortgage closed. Likewise, being closed does not make it high-ratio. The two classifications simply coexist in the same product.
A borrower could therefore have a high-ratio closed mortgage, a high-ratio open mortgage where available, or a closed mortgage that is not high-ratio. Keeping the two concepts separate makes the terminology much easier to understand.
How the Down Payment Changes the Mortgage
Crossing the 20% down-payment threshold changes the loan-to-value relationship significantly. Below 20%, mortgage loan insurance is typically required. At 20% or more, it is generally no longer mandatory, although a lender can require insurance in some circumstances.
That distinction is explored more directly in the comparison between a conventional and high-ratio mortgage.
A smaller down payment also leaves you borrowing more of the purchase price. The insurance premium can increase the financed balance further when it is added to the mortgage instead of being paid upfront.
Does a Closed High-Ratio Mortgage Have a Maximum Amortization?
Current federal rules allow an insured mortgage to have a maximum amortization of 30 years when the borrower is a first-time homebuyer and/or is purchasing a newly built home. Other insured mortgages generally have a maximum amortization of 25 years. The current insured-mortgage amortization rules
The amortization should not be confused with the closed mortgage’s term. You might have a five-year closed term within a 25-year amortization, for example. When the five-year contract expires, the remaining balance can move into another term rather than becoming immediately due simply because the original term ended.
What to Check Before Taking a Closed High-Ratio Mortgage
Start with the down payment and resulting loan-to-value ratio because those determine whether the mortgage falls into high-ratio territory. Then account for the mortgage insurance premium so you understand how much will actually be financed if the premium is added to the mortgage.
Separately, examine the closed contract’s prepayment privileges. The amount you can repay without a penalty matters if you expect to make additional payments during the term.
The interest rate deserves its own comparison as well. Mortgage insurance reduces the lender’s exposure to borrower default, which can allow insured borrowers to access competitive mortgage rates despite having less equity in the property. That does not mean every high-ratio mortgage automatically has a better rate than every conventional mortgage, so actual offers still need to be compared.
The simplest way to evaluate the product is to treat its two labels separately. “High-ratio” tells you how heavily the purchase is financed and why mortgage loan insurance is involved. “Closed” tells you what restrictions apply if you want to repay that financing faster than the contract allows.
Questions About Closed High-Ratio Mortgages
Can a closed high-ratio mortgage have a fixed or variable rate?
Yes. Fixed or variable describes how the interest rate behaves, which is separate from both the closed classification and the mortgage’s loan-to-value ratio.
Does putting exactly 20% down create a high-ratio mortgage?
Generally, no. A high-ratio mortgage has a loan-to-value ratio above 80%. A 20% down payment normally leaves an 80% loan-to-value ratio, although a lender may still require mortgage loan insurance in certain circumstances.
Can you make lump-sum payments on a closed high-ratio mortgage?
Your mortgage contract may provide lump-sum or other prepayment privileges. The permitted amount depends on the lender and agreement, and exceeding the contractual allowance may result in a penalty.
