Canadians are about to face yet another potential homebuying hurdle, as Mortgage and Housing Corp. (CMHC) is increasing its homeowner mortgage insurance premiums effective March 17, 2017.
Unlike the latest changes to mortgage regulations, announced late last year, this newest round is expected to have a minor impact. CMHC says the higher premium will result in an increase of just $5 to the monthly mortgage payment of the average CMHC-insured homebuyer.
“We do not expect the higher premiums to have a significant impact on the ability of Canadians to buy a home,” says Steven Mennill, senior vice-president, insurance. “Overall, the changes will preserve competition in the mortgage loan insurance industry and contribute to financial stability.”
“The increase in premiums for high ratio mortgages will have a minor effect on the average Canadian,” James Laird, co-founder of RateHub and president of CanWise Financial, told YPNextHome.
“Relative to the rule changes that were implemented in late 2016, this is not a major change. Premiums will be increased for all of those Canadians with less than 20 per cent down, but these premiums are added on to the mortgage and paid off over the life of the mortgage, so the cash required on closing does not change. This change specifically will not impact the borrowing habits for the majority of high ratio clients.”
Using RateHub’s mortgage payment calculator, based on the average Toronto home price of $730,472 (according to the Canadian Real Estate Association) with a minimum down payment of 6.6 per cent (or $48,047), the current premium is 3.6 per cent 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 four per cent 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 per cent, amortized over 25 years).
If that buyer has an 18 per cent down payment, the total down payment would be $131,485. At the current premium of 1.8 per cent of the mortgage amount, that buyer is paying $10,782 in CMHC insurance. At the new premium of 2.8 per cent of the mortgage amount, the CMHC premium becomes $16,772 – a $5,990 difference for that buyer. This translates to a mortgage payment increase of approximately $27 per month (based on 2.44 per cent amortized over 25 years), RateHub says.
Capital requirements are an important factor in determining mortgage insurance premiums. The changes reflect OSFI’s new capital requirements that came into effect on Jan. 1 of this year that require mortgage insurers to hold additional capital. Capital holdings create a buffer against potential losses, helping to ensure the long term stability of the financial system.
During the first nine months of 2016:
- The average CMHC-insured loan was approximately $245,000.
- The average down payment was approximately eight per cent.
- The average gross debt service ratio (GDS) was 25.6 per cent. To qualify for CMHC insurance, a homebuyer’s GDS should not exceed 32 per cent of their total monthly household income.
Premiums are calculated based on the loan-to-value ratio of the mortgage being insured. The premium can be paid in a single lump sum but more frequently is added to the mortgage principal and repaid over the life of the mortgage as part of regular mortgage payments. Additional details and scenarios are included in the backgrounder below.