A low-ratio mortgage in Canada refers to a mortgage in which the loan-to-value (LTV) ratio is less than 80%. This means that the borrower has a down payment of at least 20% of the purchase price, or equity of at least 20% in the property being refinanced. Low-ratio mortgages typically have lower interest rates and may require mortgage default insurance. The Canada Mortgage and Housing Corporation (CMHC) is a government agency that provides mortgage default insurance for low-ratio mortgages.
How does Low-Ratio mortgages work?
A low-ratio mortgage in Canada works by requiring the borrower to have a larger down payment or equity in the property being financed. Because the loan-to-value (LTV) ratio is less than 80%, the lender is at a lower risk of losing money in the event of a default.
When a borrower applies for a low-ratio mortgage, the lender will typically require them to provide proof of their down payment, such as a bank statement or other financial documents. The lender will also evaluate the borrower's creditworthiness and income to ensure they are able to make the monthly mortgage payments.
Once the loan is approved, the borrower will be required to purchase mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC) or a private insurer, unless the amount of the mortgage is below a certain threshold. This insurance protects the lender in case the borrower defaults on their loan.
Low-ratio mortgages typically have lower interest rates than high-ratio mortgages, which can make them more affordable for borrowers. However, the larger down payment or equity required for a low-ratio mortgage may make it more difficult for some borrowers to qualify.
Types of Low-Ratio Mortgage
There are several types of low-ratio mortgages available in Canada, some of the most common include:
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Conventional Mortgages: This type of mortgage has a loan-to-value (LTV) ratio of less than 80%. Borrowers are typically required to have a down payment of at least 20% of the purchase price, and mortgage default insurance is not required.
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Flex Down Mortgages: This type of mortgage is similar to a conventional mortgage, but it allows borrowers to put less than 20% down and still avoid the need for mortgage default insurance. Flex down mortgages typically require a higher credit score and may have slightly higher interest rates.
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Insured Flex Down Mortgages: This type of mortgage is for borrowers who cannot afford to put 20% down, but can still qualify for a mortgage with a lower down payment. These mortgages have a higher LTV than conventional mortgages, but still less than 80%.
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Refinance Mortgages: This type of mortgage is for homeowners who want to refinance their existing mortgages and take advantage of lower interest rates. It also has a LTV of less than 80%.
It's important to note that the type of low-ratio mortgage you choose will depend on your individual financial situation, credit history, and the amount of equity you have in your property. It's recommended to consult with a mortgage broker or lender to determine which type of low-ratio mortgage is best for you.
Pros and Cons
Low-ratio mortgages have several pros and cons that borrowers should consider before applying.
Pros:
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Lower interest rates: Low-ratio mortgages typically have lower interest rates than high-ratio mortgages, which can make them more affordable for borrowers.
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No mortgage default insurance required: Because the loan-to-value (LTV) ratio is less than 80%, borrowers are not required to purchase mortgage default insurance, which can save them money.
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Build equity faster: Because borrowers are required to have a larger down payment or equity in the property, they will build equity faster, which can be beneficial in the long-term.
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More loan options: Low-ratio mortgages provide more loan options for borrowers with good credit and stable income.
Cons:
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Higher down payment required: The larger down payment or equity required for a low-ratio mortgage may make it more difficult for some borrowers to qualify.
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Less flexibility: Low-ratio mortgages tend to have stricter lending guidelines and less flexibility than high-ratio mortgages.
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Difficult to qualify: It can be harder for some borrowers to qualify for a low-ratio mortgage, especially if they have a low credit score or a limited credit history.
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No insurance coverage: Low-ratio mortgages do not come with insurance coverage, so if the borrower defaults on the loan, the lender is not protected.
It's important to weigh the pros and cons of a low-ratio mortgage before deciding if it's the right choice for you. It's always advisable to consult with a mortgage broker or lender to determine if a low-ratio mortgage is a good fit for your financial situation.
Who provides Low-Ratio Mortgage?
Low-ratio mortgages are typically provided by financial institutions such as banks, credit unions, and trust companies. These institutions offer a wide range of mortgage products, including low-ratio mortgages, to meet the needs of different types of borrowers.
There are also mortgage brokers, who are licensed professionals that act as intermediaries between borrowers and lenders. They can help you find the best low-ratio mortgage product that fits your specific financial situation and credit profile. They can offer access to multiple lenders, and are aware of the terms, interest rates, and other features of different mortgages.
Additionally, there are online lenders and new fintech companies that have started to offer low-ratio mortgages, providing a digital platform for borrowers to apply and get approved for a mortgage.
It's important to shop around and compare the different products and rates offered by different lenders before making a decision. You can also check the reputation and credibility of the lender or broker before applying for the loan.
Low-Ratio Mortgage lenders: Step-by-Step application
The process of applying for a low-ratio mortgage can vary depending on the lender, but generally, it involves the following steps:
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Gather Financial Information: Before applying, borrowers will need to gather financial information such as their income, employment history, credit score, and assets. Lenders will use this information to determine if the borrower is financially capable of making the monthly mortgage payments.
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Get Pre-approved: Borrowers can get pre-approved for a low-ratio mortgage, which means that the lender will review their financial information and give them an idea of how much they qualify for. This can be beneficial when shopping for a home, as it gives the borrower a better idea of their budget.
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Submit a Mortgage Application: After finding a property, the borrower will need to submit a formal mortgage application to the lender. The application will require detailed information about the property, the borrower’s financial situation, and the terms of the mortgage.
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Property Appraisal: Once the application is submitted, the lender will order an appraisal of the property to determine its value. This will help the lender to determine if the value of the property is sufficient to secure the loan.
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Underwriting: After the appraisal is completed, the lender will start the underwriting process, which involves reviewing the borrower’s financial information, credit score, and employment history to determine if they are a good candidate for a low-ratio mortgage.
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Loan Approval: Once the underwriting process is complete, the lender will approve or deny the loan. If the loan is approved, the lender will provide the borrower with a commitment letter outlining the terms of the mortgage.
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Closing: Once the loan is approved, the borrower will need to close on the property. This typically involves signing a promissory note, mortgage, and other legal documents, as well as paying closing costs, such as appraisal fees and title insurance.
It's important to note that the steps and requirements may vary depending on the lender, so it's important to check with the lender for their specific process and requirements.
Fees
Low-ratio mortgages, like any other mortgages, may come with some fees. Here are some of the most common fees that borrowers may encounter:
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Application Fees: Some lenders may charge a fee for processing the mortgage application. This fee can vary depending on the lender and the type of mortgage.
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Appraisal Fees: An appraisal is required to determine the value of the property and ensure that it is sufficient to secure the loan. Borrowers will typically need to pay for the appraisal, which can cost several hundred dollars.
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Legal Fees: Borrowers will typically need to hire a lawyer to review the mortgage documents and handle the closing process. Legal fees can vary depending on the lawyer and the complexity of the transaction.
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Title Insurance: Title insurance protects the borrower and lender from any issues with the property's title, such as outstanding liens or legal disputes. The cost of title insurance can vary depending on the lender and the property's location.
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Property Taxes: Property taxes are typically paid by the borrower and are based on the value of the property.
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Home Inspection: It is not a standard requirement, but it is highly recommended to have a home inspection done before purchasing a property. This can help identify any issues with the property before the purchase, and it can cost around $500.
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Insurance: Borrowers will typically need to purchase insurance to protect the property from damage or loss. This can include homeowners insurance, mortgage insurance, and other types of insurance.
It's important to note that the fees may vary depending on the lender, the type of mortgage, and the location of the property, so it's important to check with the lender for their specific fees and requirements.
Low-Ratio Mortgages Rates
Low-ratio mortgages, like any other mortgages, come with interest rates that can vary depending on a number of factors, such as the lender, the type of mortgage, and the borrower's credit score.
Typically, interest rates on low-ratio mortgages are lower than those on high-ratio mortgages, because the loan-to-value (LTV) ratio is lower, which means that the borrower has more equity in the property and is considered to be less risky for the lender.
Interest rates on low-ratio mortgages can vary depending on:
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The lender: Different lenders may offer different interest rates, so it's important to shop around and compare rates from different lenders.
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The type of mortgage: Interest rates may vary depending on the type of mortgage, such as fixed or variable-rate mortgages.
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The term of the mortgage: Interest rates may also vary depending on the term of the mortgage, with longer terms typically having lower interest rates.
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Credit score: Borrowers with higher credit scores may be offered lower interest rates than those with lower credit scores.
It's important to note that interest rates can fluctuate, so it's important to check with the lender for the current interest rate and stay informed about the market trends.
Additionally, it's important to consider the interest rate in relation to the overall cost of the mortgage. Some lenders may have a lower interest rate, but they may charge higher fees, so it's important to consider the total cost of the mortgage and not just the interest rate
How to compare Low-Ratio mortgage offers?
When comparing low-ratio mortgage offers, there are several key factors that you should consider in order to find the best deal for you:
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Interest rate: The interest rate is one of the most important factors to consider when comparing mortgage offers, as it will determine how much you will pay in interest over the life of the loan. Compare the interest rate of each offer, and be sure to consider whether the rate is fixed or variable.
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Fees: In addition to the interest rate, you should also consider the fees associated with each mortgage offer. These can include application fees, appraisal fees, legal fees, and title insurance fees. Be sure to add up all of the fees to get a sense of the total cost of the mortgage.
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Term: The term of the mortgage, or the length of time you will have to repay the loan, will also play a role in the overall cost of the mortgage. Compare the terms of each offer and consider how they will affect your monthly payments and overall interest costs.
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Prepayment Penalties: Some lenders may charge a penalty fee if you choose to pay off the mortgage before the end of the term. Compare the penalties of each offer and consider how they will affect your ability to make extra payments or pay off the mortgage early.
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Customer service: It's also important to consider the level of customer service offered by the lender. Look for lenders that have a good reputation for customer service and are easy to get in touch with.
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Flexibility: Some lenders may offer more flexible terms, such as the ability to make extra payments or switch to a different mortgage product. Compare the flexibility of each offer and consider how it will affect your ability to manage your mortgage over time.
By considering these factors and comparing offers from multiple lenders, you can find the best low-ratio mortgage offer for your specific needs and budget
How to payoff Low-Ratio mortgage?
There are several ways to pay off a low-ratio mortgage:
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Make extra payments: One of the easiest ways to pay off a mortgage faster is to make extra payments on top of your regular monthly payments. This can be done by increasing the amount of your regular payments, or by making additional payments when you have extra money available.
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Bi-weekly payments: Another way to pay off your mortgage faster is to switch to bi-weekly payments. This means instead of making one payment per month, you make half a payment every two weeks. This can help you pay off the mortgage faster, since you will be making the equivalent of one extra payment per year.
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Refinancing: Refinancing your mortgage to a lower interest rate can help you pay off your mortgage faster. This is because a lower interest rate means lower interest costs, which will allow you to pay more towards the principal balance of your mortgage.
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Lump-sum payment: You can also pay off your mortgage faster by making a lump-sum payment, such as a tax refund, inheritance or bonus.
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Increasing the amortization period: Another way to pay off your mortgage faster is by increasing the amortization period of your mortgage. This will lower your monthly payments, but it will increase the total interest paid over the life of the mortgage.
It's important to consult with the lender or a financial advisor to understand the cost and the benefit of each method before making a decision. Additionally, you should also review the prepayment penalty clause in your mortgage contract to avoid any penalty charges.
