Conventional vs High-Ratio mortgages: What’s the difference?

One of the chief decisions that comes with buying a new home is the size of down payment you plan to make. But it’s easy to get lost in all the numbers and jargon. What does it mean for a mortgage or be Conventional or High-Ratio? What advantages are there to putting more, or less, down on your home? We’re here to help you explore the types of mortgages available and to uncover the pros and cons of each.

Let’s talk about equity

Before diving into the different mortgage types, it’s good to establish some terms. Throughout this article, we’ll be talking a lot about home equity and how it plays a role in the type of mortgage you choose. Equity is the difference between what you owe on your mortgage and the assessed value of your home. In a nutshell, it’s the percentage of your home that you own, and it grows as you pay down your mortgage principal or your property value increases. And, if you purchase another home, you can use your equity toward your next down payment.

Equity is also closely related to something called a loan-to-value (LTV) ratio. This is the amount you borrow vs the purchase price or value of your home. For example, if you make a 20% down payment on your home, your mortgage LTV ratio is 80%.

To summarize:

Equity: The percentage of your home you own. 
LTV ratio: The percentage of your home you’re borrowing.

The type of mortgage you have — Conventional, High-Ratio, or SCU Advantage — depends on your LTV ratio, so understanding this concept is key to your decision-making process.

Conventional mortgage: Cutting overall costs

Because Conventional mortgages are considered lower risk, the rates are competitive in the industry and have no requirement for mortgage default insurance. 

Key benefits

•  Lower overall charges: With competitive rates and no mortgage default insurance premiums, you’ll save on long-term borrowing costs.
• Greater home equity: Having more home equity can be extremely beneficial when building your personal net worth or to purchase another home in the future.
• More flexible borrowing options: You can use your equity to secure other loans or lines of credit at lower rates than unsecured lending offers.

Considerations

• Higher down payment required: Saving up for a 20% down payment may mean you need to save for a longer period or buy a home at a lower cost. 
• First-time homebuyers: If you’re a first-time homebuyer, it may be easier to get approved for a High-Ratio mortgage because you don’t have previous home equity to draw on.

High-Ratio mortgage: Getting you into a home sooner 

A High-Ratio mortgage is a mortgage with a down payment under 20% of your home’s purchase price. In Canada, you must have at least 5% down for homes under $500,000 (with higher minimums as prices rise).

Since this type of mortgage is considered a higher lending risk, it comes with the additional requirement of adding mortgage default insurance. This is a type of insurance that protects the financial institution in case a borrower defaults (meaning, they are unable to make payments) on their mortgage. At SCU, we offer mortgage default insurance through the Canada Mortgage and Housing Corporation (CMHC), a federally-owned housing agency, and the private mortgage providers Sagen or Canada Guaranty. This default insurance premium is added to your mortgage principal and paid over your amortization period, so you don’t have to worry about coming up with the extra money at the time of your mortgage signing.

Key benefits

• Lower down payment required: A High-Ratio mortgage allows you to enter the market sooner, since you don’t have to wait until you have saved a 20% down payment.
• Higher likelihood of getting approved: Having mortgage default insurance on your home lowers the risk for lenders, making them more likely to approve you for a High-Ratio loan.
• Access to competitive rates: Like Conventional mortgages, High-Ratio mortgages have no additional rate premiums.

Considerations
 

• Higher overall costs: Since mortgage default insurance is mandatory, you must pay a premium. Having a higher lending ratio also means you will pay more in interest throughout your amortization period.

SCU advantage mortgage: Finding the middle ground

If you’re looking for something between a Conventional and High-Ratio mortgage, the SCU Advantage mortgage might be the perfect fit for you. This mortgage allows you to make a 15% down payment without needing mortgage default insurance. In exchange for bypassing rate premiums, you’ll pay a slightly higher interest rate on your mortgage. 

Key benefits

• Skip the insurance fees: Mortgage default insurance is not required for this product, so you can save thousands of dollars in premiums.
• Get into a home sooner: Allows you to get into the market even if you have slightly under the 20% needed for a Conventional mortgage.

Considerations

• Higher down payment required: Coming up with a 15% down payment may mean you need to save for a longer period or buy a home at a lower cost. 
• First-time homebuyers: If you’re a first-time homebuyer, it may be easier to get approved for a High-Ratio mortgage because you don’t have previous home equity to draw on.

Questions to ask when choosing a mortgage type

How do you choose which mortgage option is best for you? It all depends on your unique goals and financial situation. To start, ask yourself these three questions:

1. What’s my timeline for buying a home? 

Timeline is a key factor in your decision-making process. If you don’t have the 20% down payment required for a Conventional mortgage, can you afford to wait and save longer, or build more home equity? Or is your priority to get into a home sooner, making a High-Ratio or SCU Advantage mortgage a more viable option?

Here’s an example: Imagine you’ve been saving to buy your first home, and you just got a notice that your rent is set to increase. Although you don’t have a 20% down payment, you decide to move up your timeline for buying a home and go with a High-Ratio mortgage. 

2. What other financial goals do I want to achieve?

Buying a home shouldn’t be at the expense of all other financial goals. Will you have to max out your savings to make a 20% down payment, or do you still have money set aside for an emergency fund, retirement savings, or any other priorities you may have? On the flip side, will the higher costs that come with a High-Ratio or SCU Advantage mortgage make it difficult to save for these things once you buy your home?

3. Do I have equity from a previous home?

It’s often much easier to make a higher down payment on your second home since you’re also using equity from your first home. Maybe you had a High-Ratio mortgage for your first home, but if you’ve lived there for a while, or your home value has increased, you may be able to get a Conventional mortgage the second time around.

Crunch the numbers

Still not sure which option is best for you? Our mortgage payment calculator can help by giving you a breakdown of your required down payment, monthly mortgage payment, and insurance costs.

When you’re ready, book an appointment and take the next step. Our lending specialists are here to help you along your homebuying journey.