High-Ratio Loan
Candlefocus EditorThe main risk associated with a high-ratio loan is that if the property’s value drops significantly, then its value may not be enough to cover the loan balance. In this event, the borrower would have difficulty paying back the loan in full and the lender may foreclose on the property or pursue legal action for repayment of the loan.
High-ratio loans may be attractive to some borrowers due to the lower down payment requirements; although these loans require a much higher interest rate than traditional mortgages. High-ratio loans also require borrowers to purchase mortgage default insurance. This type of insurance protects the lender should the borrower fail to make the mortgage payments. Borrowers may also be required to prove their income, employment and other financials to qualify for this type of loan.
High-ratio loan borrowers should always consider the risks and consequences of not being able to make the payments before they decide to pursue a high-ratio loan. They should also be aware of all of the costs associated with the loan, such as mortgage default insurance, higher interest rates, and potential legal costs should the loan go into default. Borrowers should also consider the possibility that a high-ratio loan may limit their ability to take on other debt, such as credit cards and car loans, due to their higher debt-to-income ratio.
In summary, high-ratio loans can be a riskier option for borrowers due to their high Loan-to-Value ratio and the possibility of default. However, they also offer an opportunity for buyers to purchase a property without needing to make a large down payment. In order to make sure they can afford the loan, borrowers should understand all the costs associated with high-ratio loans, the risks of not repaying the loan, and the possibility of limited access to other types of credit.