What is a High-Ratio Loan?
A high-ratio loan is a mortgage that has a small down payment.
How Does a High-Ratio Loan Work?
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.
[If you're ready to buy a home, use our Mortgage Calculator to see what your monthly principal and interest payment will be. You can also learn how to calculate your monthly payment in Excel.]
Why Does a High-Ratio Loan Matter?
High-ratio loans typically have higher interest rates because they are riskier. If the borrower defaults on the , 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.