What is the difference in payments and ratios between High-ratio and Conventional mortgages?

Question

On bank's site it says:

• Conventional mortgage: means your downpayment is at least 20% of the purchase price.
• High-ratio mortgage: means your downpayment is less than 20% of the purchase price.

High ratio mortgages must be insured by a third party such as the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada and require you to pay an insurance premium.

So what is the difference between those two in terms of payments? I don't see any separation for rates between high and conventional on the rate listings page. Do those rates they list on the site assume by default that your downpayment is more than 20% or less?

How does making 20% downpayment affects your monthly payments? Lets say if monthly payments for 18% downpayment are $1000, would there be some dramatic changes between 19% and 20% as comparing to 18% and 19%? Does it affect amount of mortgage you can afford?

Answer 1

The lender (not the borrower) pays the insurance premium to CMHC or Genworth at the beginning of the loan. The lender will then pass on the cost of the premium to the borrower, typically by adding it to the principal of the loan. The cost of the insurance premium is calculated as a percentage of the loan, and CMHC's rate can be viewed here.

Let's assume you're taking out a fixed mortgage at 4.29% and 25 year amortization.

A 20% down payment would leave a $200 000 principal. The monthly payment would be $1083.72.

A 19% down payment would leave a $202 500 principal before the mortgage insurance premium. That premium would be 1% of $202 500, or $2025. That would get added on to your principal for a total loan of $204 525. The monthly payment would be $1108.24.

That's $24.52 more per payment or a 2.26% increase. It's an extra $4856 for the premium and additional interest paid over the lifetime of the mortgage.

Answer 2

I'm not 100% sure if the terms are exactly the same in Canada, but the insurance that you have to buy is called PMI (Private Mortgage Insurance) here in the states.

PMI is an insurance policy that insures the lender for the difference between how much you put down and 20%. So, if you put down 5% on a $100,000 mortgage, and you defaulted, the policy would pay the lender $15,000 which is the difference between your downpayment of 5% ($5,000) and 20% ($20,000).

So, the cost of the policy would vary based on who is issuing the policy, your credit rating, and the amount of your downpayment (since that determines how much the policy is for).

The cost of the PMI is just a separate line item on your mortgage payment, and shouldn't affect your actual interest rate much if any. Once you reach 20% equity, the PMI payment will be removed from your monthly payment. Also, if you can prove by professional appraisal that you have 20% equity, you may be able to get your PMI removed earlier than that.

At least that's how it all works here in the states, although I can't imagine it's much different in Canada.