Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

High-Ratio Loan

What it is:

High-ratio loans typically have higher interest rates because they are riskier. If the borrower defaults on the loan, the bank might not be able to sell the property for enough to repay the loan. The lender may require the borrower to buy mortgage insurance as well.

How it works (Example):

Let's say John Doe wants to buy a $100,000 house. He only has $5,000 for a down payment, so he asks Company XYZ to lend him $95,000. However, Company XYZ typically requires a 20% down payment (that is, $20,000 in John's case). The loan-to-value on his loan would instead be $95,000/$100,000, or 95%. Thus, John Doe is asking for a high-ratio loan.

Why it Matters:

A high-ratio loan is a mortgage that has a small down payment.