Why only High Ratio mortgages privileged?

HSBC has been popular with its promotion of the lowest mortgage rate at 0.99% APR since the beginning of this year.

Like many other mortgage promotions, there are terms and conditions to apply. One of the conditions is that the promotion only applies to high ratio mortgages.

Many consumers might wonder what is a high ratio mortgages and why only high ratio mortgages are privileged.

First of all, what ratio does it refer to when we talk about high ratio mortgage? Well, it refers to loan-to-value ratio.

Most people need to get a mortgage loan from a financial institution to fund their real estate purchase. In the meantime, the lender would ask the borrower to fund a portion of the purchase price (in some cases, the appraised value) from his/her own pocket. The ratio of the mortgage loan amount to the purchase price or appraised/market value is called loan-to-value ratio.

how high of the loan-to-value ratio is high enough to be called "high ratio"? It depends. the cutoff point is defined by CMHC, a quasi government agency who provides mortgage default insurance. For most of CMHC history, the cutoff point is 75%. Mortgages with a loan-to-value ratio higher than 75% is called "high ratio mortgages". Otherwise, it's called "conventional mortgage". sometime around 2005-2006, the cutoff point was increased to 80%.

Why is it up to CMHC to define a high ratio mortgage? Simply because high ratio mortgages are required by law to purchase default insurance and CMHC has the mandate to offer default insurance.

The premium, or the cost of default insurance is normally to be paid by the borrower.

sometimes conventional mortgages need to have default insurance too, which is mostly seen when conventional mortgages are held for sale. Default insurance is a common measurement to increase its credit rating. In these cases, the premium of default insurance has to be paid by the mortgage holder, i.e., the lender.

When the lender decides to sell the mortgages and get its fund back quickly, it has to buy default insurance no matter the mortgage is conventional or high ratio. For those high ratio mortgages, borrowers already paid for the premium and therefore saved the lender a few (tens of) thousand dollars. Therefore, it's not strange to see borrowers of high ratio mortgages get a little bit rewards in terms of a lower mortgage rate.



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