When you applying for a mortgage, lenders use a ratio called loan to value. Your loan to value is exactly what it sounds like, the size of your mortgage in relation to the value, written as a percentage.
For example, if you have a $500,000 home and your mortgage is $300,000 and your down payment/equity is $200,000, your loan to value is 60%. This means that the bank owns 60% of your home and you technically own 40% because if your house sold for $500,000, you would only get $200,000 as the remaining amount goes to the lender to pay out your mortgage.
When someone says high-ratio and conventional mortgages, that is referring to your loan to value. If your loan to value is more than 80%, you have what is called a high-ratio mortgage. A high-ratio mortgage is when you own less than 20% of your home. You will also be required by law to pay what is called mortgage default insurance to help protect the lender if you were unable to maintain your mortgage payments.
A conventional mortgage is when you own 20% or more of your home and your mortgage amount is less than 80% of the value of your home. You do not need to pay mortgage insurance premiums if you purchase a home with 20% or more as well. When refinancing your home and borrowing against your equity, lenders are not allowed to increase your mortgage to an amount above 80% of your home’s value. This means, if you own less than 20% of your home, you cannot refinance or take equity out.
You are also not allowed to purchase a rental property and receive a high-ratio mortgage as you are required to put 20% down. Conventional and high ratio mortgages will also affect your interest rates as most lenders incentives high-ratio buyers to work with them by offering lower interest rates.
There are several other categories when looking at loan to value and what each one can give you in terms of borrowing power, however, when it comes to high-ratio and conventional, these are the biggest differences.
If you have any questions relating to high-ratio or conventional mortgages, contact your local Dominion Lending Centres mortgage professional.