A high ratio mortgage is a real estate loan for 80% or more of the property value. Some definitions adjust this threshold slightly and put it at 75% of the appraised value of the real estate. High ratio mortgages are more risky for lenders, as there is a greater chance of default. For borrowers, they can be a path to home ownership if they do not have access to a large down payment, but do have the income to support the monthly mortgage payments.
At the time of loan origination, the lender will appraise the property and determine how much it is willing to loan given the property value, the agreed-upon price, and the borrower's credit risks. It may offer a high ratio mortgage if the borrower has a low down payment but should be able to handle the costs of loan servicing. Borrowers may put down as little as 3% on a loan.
The limited equity in a high ratio mortgage is a cause for concern. If the value of the property declines, the loan can be worth more than the property and the borrower may walk away rather than continuing to make payments. Borrowers also cannot draw upon their home equity to make repairs and cover other costs of home ownership, which may make it difficult for them to maintain the property. There is also a risk that the payments will become too high, especially in the event of job loss or changes in life circumstances, and the borrower may not be able to service the loan.
Lenders typically require mortgage insurance on a high ratio mortgage. This insurance product will cover the costs of the loan if the borrower defaults. Borrowers may be able to obtain insurance through government programs if they qualify on the basis of income and other characteristics, or they can buy private insurance. The cost of insurance is based on the amount of the loan and the degree of risk. A higher interest rate can also be typical to offset the risks of the loan.
The high ratio loan can be a useful tool for promoting home ownership. Many nations have government programs to assist citizens with home purchases. These programs may provide insurance, grants to help with down payments, or additional loan products to members of the public who qualify. Borrowers concerned about the cost of a home can meet with a mortgage broker to discuss their needs and determine if a high ratio mortgage would be appropriate for them.