Planning to make a smaller down payment on your home? A new rule is on the way that will squeeze your wallet even further. The Canada Mortgage and Housing Corporation (CMHC) announced today that it is hiking homeowner mortgage loan insurance premiums for mortgages taken out on or after March 17.
It’s the third time in three years the Crown Corporation has increased insurance premiums, hiking them by approximately 15% in May 2014, and by another 15% for those paying less than 10% down in June 2015.
This most recent change will impact premiums for all high-ratio (less than 20% down) buyers as well as specific circumstances for those paying 25% down.
Update: Private mortgage insurer Genworth has since matched the CMHC premium increases. Canada Guaranty, Canada’s third private insurer, states it is still reviewing and studying the changes before taking action.
Mortgage Insurance Premium Changes
|Loan to Value Ratio||Standard Premium (Current)||Standard Premium effective|
March 17, 2017
|Up to and including 65%||0.60%||0.60%|
|Up to and including 75%||0.75%||1.70%|
|Up to and including 80%||1.25%||2.40%|
|Up to and including 85%||1.80%||2.80%|
|Up to and including 90%||2.40%||3.10%|
|Up to and including 95%||3.60%||4.00%|
|90.01% to 95% – Non-Traditional Down Payment||3.85%||4.50%|
What Does This Mean for Your Mortgage Payments?
Unlike the mortgage stress test introduced last November, this won’t impact your ability to qualify for a mortgage, but it does mean your monthly payments will be slightly higher – by about $5 for the average homeowner, estimates the CMHC. “We do not expect the higher premiums to have a significant impact on the ability of Canadians to buy a home,” stated Steven Mennill, CMHC’s senior vice president of Insurance. “Overall, the changes will preserve competition in the mortgage industry and contribute to financial stability.”
This sentiment is echoed by James Laird, president and co-founder of mortgage brokerage Canwise Financial, who says it pales in comparison to the drastic mortgage changes introduced last year. “The increase in premiums for high-ratio mortgages will have a minor effect on the average Canadian,” he says. “Relative to rule changes that were implemented in late 2016, this is not a major change.”
He adds that because mortgage insurance is calculated and applied after the mortgage has been granted, it won’t hurt homebuyer’s qualification prospects. “… These premiums are added onto the mortgage and paid off over the life of the mortgage, so the cash required on closing doesn’t change. This change specifically will not impact the borrowing habits for the majority of high-ratio clients.”
Prepare to Pay Thousands More Over Your Mortgage’s Lifetime
However, just because it’s a small monthly hit doesn’t mean homeowners aren’t under more financial pressure. According to calculations by Ratehub.ca, homeowners will have to shell out a few thousand more over their mortgage’s amortization – while it’s doled out in small increments, that’s hardly chump change.
According to Ratehub:
“Based on the average Toronto home price of $730,472 (according to CREA) with a minimum down payment of 6.6% (or $48,047) the current premium is 3.60% of the mortgage amount (purchase price less down payment). For that mortgage amount of $682,425, the CMHC premium is $24,567.
“With the new premium at 4.00% of mortgage amount, the CMHC premium becomes $27,297–an increase of $2,730. This translates to a mortgage payment increase of approximately $12 per month (based on today’s best rate of 2.44%, amortized over 25 years).”
Why Is CMHC Increasing Premiums?
The Canadian government has been looking to reduce both risky borrowing behaviour and the amount of default exposure facing lenders and the CMHC – it’s a layer of protection should an economic downturn force homeowners to stop paying their mortgages. The Office of the Superintendent of Financial Institutions (OSFI) passed rules late last year that require lenders to have more mortgage capital in their coffers. This change will help dissuade borrowers from making the smallest payments possible, and buyers to save for larger down payments for their home purchases.
Are More Mortgage Changes Coming?
Well – yes and no. Bill Morneau, the Liberal Minister of Finance, said to reporters earlier this week that the government isn’t currently mulling over new rules. “We continue to monitor the housing market and to make sure that the risks are appropriate for the market. We don’t have any measures under consideration at this stage, but we will continue to monitor to ensure that the housing market is stable and that people are protected in their important investment.”
However, we do know that a proposal to have lenders shoulder more financial risk is currently being reviewed. As Zoocasa stated in our Top 6 2017 Real Estate Predictions:
A proposal to have the banks shoulder more risk for defaulting mortgages could also cramp their pocketbooks. While the plan is currently being reviewed by the industry, lenders may be on the hook for 5 – 10% of costs for mortgages that fall through in 2017, a change that will surely be reflected in consumer rates.
It remains to be seen when and to what extent these changes will occur, so be sure to check back for our ongoing coverage!