Many first-time buyers struggle to come up with a 20% down payment to buy a Toronto loft. Even for the most diligent of savers, it's getting tougher for buyers to get a foot on the property ladder with soaring Toronto real estate prices without inheritance, a living inheritance from the bank of mom and dad or a personal loan. To make matters worse, the issue just compounds with time as most people can't out-earn or out-save the average annual rate of price increase on Toronto lofts for sale. The cost of entry keeps on increasing.
But all is not lost. There is an alternative option to consider and that's the high ratio mortgage. It's not right for all buyers - we only recommend it for those with stable incomes, who are established in their careers with a clear path for advancement and who are responsible with credit - but it's worth a conversation with your Mortgage Broker and Toronto Loft Realtor.
Here are the basics to get you started in figuring out if a high ratio mortgage is right for you.
While 20% is considered a traditional down payment, it is not mandatory by any means. In Canada, the minimum down payment on a single-family dwelling under $1M is 5%. Can everyone get mortgaged with only 5% down? No. There are many other factors to consider. But it does mean that you have a fighting chance if you're a solid candidate from a lender's perspective.
So, what is a high ratio mortgage exactly? It's a type of mortgage where the lender is mortgaging you for greater than the standard 80% of your property's price. Beyond that, the only real difference between a high ratio mortgage and a standard mortgage is that your mortgage will need to be insured against payment default because you represent a greater risk to the lender.
If you are ever in default of payment on your mortgage, mortgage insurance is what protects the lender and so it makes you a more attractive prospect (i.e. a safer bet) if you have it. To qualify for mortgage insurance in Canada, the purchase price of your loft must be under $1M.
The main mortgage insurers in Canada are Genworth Canada, Canada Guaranty and the Canada Mortgage and Housing Corporation which is a Crown Corporation. It's possible to find a lender who will agree to a high ratio mortgage without default insurance but chances are the interest rate will be so high that it'll make more sense to go with an insured option. With an insured, high ratio mortgage, you can be financed with as little as 5% down which makes a Toronto loft purchase much more viable for first-time buyers.
You have to factor the cost of insurance into your budget. You can either pay it as a lump sum up front (although if you need a high ratio mortgage, chances are you don't have the savings to do this) or pay it monthly / bi-weekly on top of your regular mortgage payments ot the bank. The bank will arrange this for you so it'll all be withdrawn as one lump sum.
It's absolutely critical that you do the math to make sure that you can still afford the insurance premium when mortgage rates go up a few percentile points as they will eventually do. And remember that insurance protects the lender, not you. And so if you miss a mortgage payment to the bank, your insurer will cover it but then you owe them that amount plus penalty fees. If you don’t settle up within the time frame and parameters set by the insurer, they will take on legal proceedings to enforce payment which will result in even greater sums owed.
In short, don’t default on payment. If you are ever in danger of doing so, speak with your lender immediately about your options before the issue snowballs.
High ratio mortgages are riskier than standard mortgages but they can get you on the property ladder faster which means you're building equity sooner and taking advantage of today's low interest rates. But high ratio mortgages aren't right for everyone; in some cases, you may be better continuing to rent, providing you earn enough to sock away sizeable savings each month to build that down payment fund up.
A good candidate for a high ratio mortgage is:
a) Someone who's not just starting out in their career - you want to be at least a few years into your working life with a clear path for advancement. You also want to know that if you lose your job, you have the skills and experience to be an attractive candidate for other employers so that you're not long without a job.
b) Someone who's able to save and likely able to put down extra each year towards their mortgage.
c) Someone who is responsible with credit and whose household debt to income ratio, including their high ratio mortgage payments with insurance premiums, stays below 36%.
If this sounds like you, then talk to a mortgage broker about your options for high ratio mortgages. Just make sure that you work with a Toronto loft expert and not a generalist Realtor when looking for properties. The biggest mistake that buyers on high ratio mortgages make is buying the wrong property to start with. Overpay going in or pick a loft that doesn't have strong growth potential and you could end up owing more than you can get come re-sale. The Toronto loft market is incredibly robust right now but you have to be smart about it and protect yourself against possible market corrections.
Lead image: Unit 726 at the Merchandise Lofts is currently for sale. It's great value for first-time buyers. Asking $339,000.