Homes of up to $1.5 million now eligible for mortgage insurance

Effective December 15, 2024, the maximum home price for which buyers can obtain mortgage insurance when making a down payment of less than 20% – the insured mortgage cap – will increase to $1.5 million.

The cap was set at $1 million in 2012 and hadn’t been adjusted since then, despite rising home prices.

But by increasing the cap, more homes - especially semi-detached and detached homes - will fall under the insured mortgage threshold, and more buyers – particularly those in high-cost markets like Vancouver and Toronto, where starter homes typically cost over $1 million – will be able to put down less than the requisite uninsured down payment of 20% of the purchase price.

Victor Tran, mortgage broker and RATESDOTCA real estate expert believes these proposed changes will ease many buyers into the market, but buyers must be caution about the unknowns.

“This decision by the Government will allow home buyers in Ontario and B.C. to enter the market,” Tran explains. “Many home buyers have been saving up to 20% down payment to enter the market at that $1 million price point. But now with this option to purchase a house of the same amount with less than 20% down, buyers will have to factor in additional costs.”

And the costs are considerable.

What is mortgage default insurance?

It’s important to understand what mortgage default insurance actually is, and why it’s necessary for many homeowners, as well as what it costs.

Canada’s three mortgage insurance providers – CMHC, Sagen and Canada Guaranty – offer insurance to lenders who provide mortgage to home buyers putting under 20% down payment towards a house.

Mortgage insurance protects lenders, rather than homebuyers – the less down payment a buyer puts down, the more risk the lender is taking on. In case of a buyer defaulting on their mortgage, the insurer covers the lender for any lost interest, principal, and fees.

The cost of this insurance is then passed on to the borrower in the form of mortgage default insurance premium, which is valued by the loan-to-value ratio of the mortgage and typically ranges between 0.6% to 4% of the mortgage amount.

“Mortgage insurance premium is a one-time charge added to your mortgage,” Tran says. “Regardless of how much you pay off on your mortgage, you will continue to pay the premium until the end of amortization period.

Homebuyers who decide to put down less than 20% on a mortgage of up to $1.5 million should really do the math, as paying mortgage insurance premiums as well as interest on a larger principal could significantly increase homebuyers’ mortgage payments.

“There are no risks involved, just higher costs in the long run,” Tran says. “For some new buyers, taking this opportunity to enter the market despite additional costs might be worth it. But some buyers might not find this deal with the mortgage provider a sensible financial decision to make.”

It is important to note that some provinces have combined their provincial sales tax (PST) with GST to form HST, other provinces treat the GST and PST as separate entities.

This tax is usually a part of closing costs at the time of final sale of the property and first-time home buyers must consider this cost in their mortgage calculations.

Looking ahead: What these changes mean for the real estate market

On the heels of Bank of Canada’s interest rate cuts in June and July 2024, Canada’s housing market experienced slight gains in home sales. In the month of August, month-over-month and year-over-year, the national housing market experienced slight gains.

However, Ontario and BC have seen markets decline in August 2024. Home sales are not at par with the rising inventory and prospective homebuyers in BC and Ontario have seen some turbulent times in the past three to five years.

“Lowest sales in a year, high interest rates, looming recession, upcoming elections in the U.S., high unemployment rates, all these factors have contributed to many buyers waiting on the sidelines to jump right into the market,” Tran says, adding that the mortgage rule changes would trigger greater competition especially in the $1 million and $1.5 million house price range going forward.

“This could lead to bidding wars, and greater interest in the housing market as interest rates also fall, causing greater demand in the housing sector,” he asserts. “If a new buyer wants to avoid this competition and stay ahead, now is the time to get into the market.”

The mortgage changes are open to all buyers, not just first-time home buyers and could potentially pique the interest of investors and first-time buyers alike, fueling even more competition.

As the Canadian government adjusts mortgage insurance rules, it’s essential for prospective homeowners to remain vigilant about the associated costs, including mortgage insurance premiums and the long-term financial implications of lower down payments.

As Tran highlights, while entering the market with a smaller down payment may seem appealing, the overall costs must be carefully weighed against personal financial situations. Whether you're a first-time buyer or investor, understanding these shifts in mortgage policy can empower you to make informed decisions. Now might just be the right moment to explore your options and take that crucial step toward homeownership.