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 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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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