Definition: A low-ratio mortgage, also known as a conventional mortgage, is a loan where the borrower’s down payment is 20% or more of the property’s purchase price. This higher down payment means the loan-to-value (LTV) ratio is 80% or less, reducing the lender’s risk and eliminating the need for mortgage default insurance.

Key features of low-ratio mortgages

• Lower risk for lenders: Since the borrower has a greater financial stake in the property, low-ratio mortgages present less risk for lenders compared to high-ratio mortgages.
• No mortgage insurance required: Low-ratio mortgages do not require mortgage default insurance, unlike high-ratio mortgages where the down payment is less than 20%.
• More favourable terms: Lenders may offer better interest rates or terms on low-ratio mortgages because of the lower default risk.

Benefits of a low-ratio mortgage

• Lower monthly payments: Without the added cost of mortgage insurance, borrowers benefit from lower overall monthly payments.
• Improved borrowing flexibility: With higher equity in the property, borrowers often have more refinancing or equity take-out options available in the future.
• Potential for better rates: Lenders may offer lower interest rates for low-ratio mortgages, translating into long-term savings.

Considerations

Low-ratio mortgages require a significant down payment, which may not be feasible for all buyers. However, the savings on mortgage insurance premiums and potential for better rates make it an attractive option for those who can afford the upfront cost.

Low-ratio mortgages are common among repeat buyers and those purchasing lower-cost properties, where a 20% down payment is more accessible.

Last modified: November 5, 2024