At the beginning of April, the Canada Mortgage and Housing Corporation (CMHC) announced that it was raising the premiums on mortgage loan insurance for buyers with less than 10 per cent for a down payment by approximately 15%, effective June 1, 2015.
A few days later, Genworth, an alternative mortgage insurance provider in Canada, followed suit and matched the CMHC’s increased rates. (At press time, Canada Guaranty, the other alternative insurer in Canada, has not adjusted their rates to match Genworth and CMHC.)
Here's how your insurance premium pricing will change, based on your down payment amount:
|Loan-to-Value Ratio||Standard Premium(Current)||Standard Premium(Effective June 1st, 2015)|
|Up to and including 65%||0.60%||0.60%|
|Up to and including 75%||0.75%||0.75%|
|Up to and including 80%||1.25%||1.25%|
|Up to and including 85%||1.80%||1.80%|
|Up to and including 90%||2.40%||2.40%|
|Up to and including 95%||3.15%||3.60%|
|90.01% to 95% Non-Traditional Down Payment||3.35%||3.85%|
Overall, the premium hike amounts to an increase of $5 a month in homeowners' insurance payments - but that adds up over time. Take, for example, if you were to apply for a $350,000 mortgage with only a 5 per cent down payment ($17,500), you’ll have to pay a fee of $9,000 for mortgage insurance, which gets rolled into your premiums. (The old fee in effect until May 31st would be $7,875.) And remember - you'll be paying interest on that additional amount.
Here are some strategies to help you increase the amount of money you have available for your down payment and try to avoid some of the loan insurance fees.
Tip 1: Build a Savings Strategy
The first step in any savings plan is to track your ongoing expenses to see where you can cut back. Create a simple spreadsheet and then for at least two or three months, track every single purchase you make over the course of each day, from a cup of takeout coffee to your rent and utility bills. Once you have a few months’ data on hand you’ll start to see areas where you can cut back and funnel that money towards your down payment. You don’t necessarily have to be a miserable miser, but if you see that you’re spending more on takeout meals or entertainment than you thought, you can start to strategize ways to reduce those ongoing costs.
That said, if homeownership in the near future is a goal for you, perhaps this year you plan a budget staycation in lieu of a pricey overseas holiday.
Tip 2: Set It Aside
It’s human nature to see money sitting in a bank account and want to spend it. To avoid the temptation, set up a separate savings account with the highest available interest rate and put any extra money you can scrape together in there. (With tax season at hand, consider funnelling any refund you get into your down payment account.)
If you know you won’t have enough money available for at least another year or more, you might want to park your funds in a secure investment such as a GIC that will earn you a higher interest rate, but you won’t be able to cash out until the completion of the term.
Tip 3: Downsize Your Expectations
While you may dream of owning a detached four-bedroom home complete with a white picket fence around your spacious lot, current housing market conditions put those dreams temporarily out of reach for first-time homebuyers in most urban areas. For many, condos have become the new “starter home.” The lower price-point means you’ll need less money on hand for your down payment. Another common option is to buy a lower-priced “fixer-upper” and slowly renovate it to your liking as money becomes available.
Tip 4: Check Emotions at the Door
As someone who’s lost out on numerous multiple offer scenarios over the years, I know how frustrating it can be to make the decision to place an offer on a house, only to find out someone has outbid you. But I honestly don’t see those cases as “losing.” For each one, my wife and I determined what we felt the house was worth and placed our offer accordingly. In the cases where the “winning” bidder ended up paying tens of thousands of dollars more than we offered, we felt those buyers had overpaid. Getting caught up in the auction-style excitement of offer night can lead to you overpaying, and requiring a higher down payment than you’re able to put up.
Tip 5: Draw Down Your RRSPs
Under the federal Home Buyers’ Plan you can withdraw as much as $25,000 from your RRSPs (or $50,000 for a couple co-signing on a mortgage) to put towards your down payment. Any funds withdrawn are paid back in annual installments over the following 15 years.
Tip 6: Beg Or Borrow
Finally, if it is a potential option, consider asking family or close friends if they’re willing to lend you the shortfall at a low (or no) rate of interest. In order to avoid damaging the relationship for the long-term, offer to repay the loan as the same schedule you make your mortgage payments.
Will the recent increase in mortgage insurance premiums affect your ability to own a home?