What is a High Ratio Mortgage?

High ratio mortgages are available for traditional residential homes, investment properties, and multi-unit residential complexes such as apartment buildings. On residential homes, a high ratio mortgage is one that exceeds 80% of the associated real estate security for qualified income applicants. For those self-employed borrowers seeking financing on low-doc programs, a high ratio mortgage is deemed to be any loan in excess of 75% of the real estate security.

A High ratio mortgage, or insured mortgage as they are sometimes referred to, are considered riskier than their conventional mortgage cousins as there is a reduced amount of equity available should the borrower default on the mortgage payments. In some cases, as a result of looser borrowing standards in the 21st century, some borrowers may have a high-ratio loan that exceeds the value of their real estate security.

As a result of this higher risk, in Canada all of the traditional mortgage lenders are required to insure all of their mortgage loans that exceed the conventional mortgage maximums. The result has been a reduction in the required capital reserves banks set aside to cover losses on such mortgages, despite their higher risk, as the various high ratio mortgage insurance companies such as CMHC, GE, and AIG have agreed to re-imburse the original mortgage lender for any losses on insured mortgages.

In 1946, CMHC was founded to expand the demand for housing in Canada and the accessibility of homeownership for less well-to-do borrowers. The result was a half-century housing boom that saw a continued decline in the size of downpayments, and the advent of leveraged investment properties.

High ratio mortgages have become much more prevalent in the mortgage industry. These mortgage products cater to those borrowers who have steady cash flow, but are unable to save for a large down payment or those who may have recently entered the job market (eg: recent graduates

These insured mortgages are now available for first mortgages, second mortgages, and even secured lines of credit. Even borrowers with slightly blemished credit, or unusual income situations, may qualify through a mortgage broker in Toronto and Canada’s non-bank mortgage lenders.

FACTOID:The invention of the mortgage insurance platform was a key enabler in the securitization process, as insured mortgage loans have become a low risk investment for many institutional and private investors around the world. In Canada, the majority of these mortgage loans were historically funded and packaged by CMHC, and then securitized through the Canadian Mortgage Bond (CMB) program.

TIP: The invention of high ratio insurance has allowed investors to purchase income producing property with substantially reduced equity, thus increasing their returns as a result of leverage. While such strategies do carry inherent risks, they have become the cornerstone of many investors wealth generation strategies.

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