Note: Mortgage insurance premium increases go into effect on March 17th, 2017.
If you’re applying for a mortgage with a small down payment, be prepared to pay a little more every month for default insurance.
The Canadian Mortgage and Housing Corporation recently announced it will increase the premiums for ‘mortgage default insurance’ (also called mortgage loan insurance) effective March 17, 2017.
“We do not expect the higher premiums to have a significant impact on the ability of Canadians to buy a home,” said Steven Mennill, CMHC’s senior vice-president for insurance.
Mortgage default insurance is required for anyone buying a home in Canada with a down payment of 20% or less. However, the cost varies depending on how much you actually put down. Right now, anyone with a down payment between five and 10% pays an extra 3.6% on top of their regular mortgage payments. Come March 17, this will go up to 4%.
The changes are necessary to “contribute to financial stability,” according to Mennill. Mortgage loan insurance protects lenders in case the homeowner defaults on their loan. This is the third time rates have gone up in the past four years.
Increase of “approximately 5 dollars a month”
CMHC says the cost to the average homebuyer will be “negligible” for most homeowners, adding that the average buyer will see an increase of just $5 a month.
For those with small down payments (5%-10%), CMHC points to this chart, showing even at the high end of the property market the increase stays below $20 a month.
Loan Amount/Increase to Monthly Mortgage Payment
$150,000 - $2.82
$250,000 - $4.70
$350,000 - $6.59
$450,000 - $8.47
$550,000 - $10.35
$850,000 - $15.98
Based on a 5-year term @ 2.94% and a 25 year amortization
“We are not doing this to affect housing markets or valuations...that’s not the objective,” said Mennill. CMHC says the increase in mortgage default insurance is to compensate for new rules from the federal government. As of January 1, mortgage insurers were required to hold additional capital to continue operating.
Bigger hike for buyers with 10-20% down payments
Premiums for homebuyers who put 10% to 20% down will see a bigger hike, even though they’re paying more money upfront. Specifically, buyers with a down payment of 15% to 20% will see the biggest jump in their premiums, by about 1%. According to CMHC, the following shows how much extra that will equate to each month:
Loan Amount/Increase to Monthly Mortgage Payment
$150,000 - $7.06
$250,000 - $11.75
$350,000 - $16.46
$450,000 - $21.16
$550,000 - $25.86
$850,000 - $39.96
Based on a 5-year term @ 2.94% and a 25-year amortization
Homebuyers who put 10 to 15 per cent down are looking at a smaller rate increase of 0.7%:
Loan Amount/Increase to Monthly Mortgage Payment
$150,000 - $4.94
$250,000 - $8.23
$350,000 - $11.52
$450,000 - $14.81
$550,000 - $18.10
$850,000 - $27.98
Based on a 5-year term @ 2.94% and a 25-year amortization
Still, CMHC says these homebuyers make up just one-third of their clients; the vast majority of homebuyers who need mortgage default insurance put less than 10% down.
Premiums rising, even for mortgages with big down payments
As mentioned before, mortgage loan insurance is only required when a homebuyer has a down payment of less than 20%, but banks often take out default insurance for mortgages with a bigger down payment too. They do it to protect themselves against any risk on low-ratio loans (mortgage loans that are no more than 80% of the value of the home).
Though right now, this means an increase in premiums on the bank’s end, many in the industry fear these costs will end up getting passed on to consumers down the road, even though this insurance is not required by law and these homebuyers are putting a substantial amount of money down.
Not affecting current mortgages
If you already have a mortgage that carries default insurance, don’t worry: your premiums are not going up. The rule change only affects new mortgages as of March 17, regardless of your closing date. After that point, the new rates are set in stone.
If you’re currently in the market to buy a home, you can easily find out how your premiums will be calculated by using a Mortgage Affordability Calculator.
And remember, the best thing you can do when you’re buying a house is to shop around for the best deal on a mortgage. This will help you save money, despite raising premiums and allow you to find the mortgage that fits your life.
