Conventional Mortgage Definition
A conventional mortgage is a loan for no more than 80% of the appraised value or purchase price of the property.
To qualify for a conventional mortgage, your down payment, or the cash you provide for the purchase price, must be at least 20% of the purchase price. A mortgage in which more than 80% of the fair market value of the property, also called the lending value, is referred to as a high-ratio mortgage. The “ratio” is the percentage of money borrowed in comparison to the value of the property.
If you are purchasing a home with a purchase price of $200,000, your down payment must be at least $40,000 to qualify as a conventional mortgage. If you need to borrow more than $160,000 for the $200,000 home, you must obtain a high-ratio mortgage. High ratio mortgages can be obtained with as little as a 5% down payment.
The down payment will come from other sources of the buyer. This may be cash or proceeds from the sale of other property owned by you. Normally, the down payment in a conventional mortgage cannot be borrowed money.
Benefits of a Conventional Mortgage
Since the buyer is making a larger down payment on the property, the buyer has more immediate equity in the property. Because the buyer will have a fair cushion of equity, the risk to the bank isn’t as great as in lower down payment purchases. Thus, depending on the lender, there are more options available like a Home Equity Line of Credit (HELOC).
In addition, conventional mortgages do not often require mortgage insurance. High ratio mortgages must be insured by the Canada Mortgage and Housing Corporation (CMHC) or another company approved by the lender, such as Genworth Financial or Canada Guaranty. The insurance will protect the bank in the event of a default on the loan.
The insurer will charge a fee for this insurance. The amount of the fee will depend on the amount you are borrowing and the percentage of your own down payment. Typical fees range from 1.00% to 3.50% of the principal amount of your mortgage. This amount may be paid up front or added to the principal portion of your mortgage. Mortgage insurance is for the benefit of the bank, not the buyer, though the buyer pays the premium. If the borrower defaults, the proceeds of the insurance will be paid to the lender, not the borrower.
If you would like to talk more about the difference between a conventional and a high ratio mortgage, please contact us anytime!