What you need to know
An announcement last week made by Canada Mortgage and Housing Corporation (CMHC) advised the mortgage insurance premiums will be increasing effective May 2014. This week, I want to highlight how those changes will affect a potential borrower looking for new financing. Although the updated premiums are expected to have a minimal affect on our housing market, it is still important to know the “who, what, when and how” these changes will affect you and your mortgage.
Let’s start with “WHO” will be affected by these changes. Given mortgage default insurance is most often required when you are purchasing a property with less than 20% downpayment, it is those borrowers who will be most impacted by the increase in premiums. Having said that, I believe the impact of the increases should be quite minimal. For those of you who don’t know exactly what the purpose of this insurance is, it protects the lender in the event the borrower stops paying their mortgage. The cost of this insurance is covered by the borrower in the form of a premium that is added to the original mortgage amount requested. The amount of this one time premium is then amortized over the life of your mortgage which is usually up to 25 years. This recent premium increase actually has little effect on your mortgage payments.
These new rules mostly impact borrowers purchasing a home, though will also apply if you’re refinancing and adding more funds to your mortgage amount. Your mortgage professional can provide more details specific to your situation.
The new mortgage default insurance premiums are effective May 1st, 2014. Those applications with an active offer to purchase or a refinance that are approved for insurance prior to May 1st will have the lower premiums applied regardless of the closing date. Do be advised the insurers do not offer “pre-approvals” so if you are concerned with the higher premiums, take action prior to the May 1st date.
The mortgage default insurance premium is calculated as a percentage of your total mortgage amount. The percentage applied varies based on the size and type of your down payment, as well as type of employment income being used in your application. This percentage charged is WHAT is actually changing with premiums increasing by an average of 15%. Today if you were buying with a 5% downpayment, your insurance premium would be around 2.75% of your mortgage amount. With the new changes coming into effect in May, you will now pay around 3.15% of your mortgage amount for the exact same insurance. While it is still an increase, again, the actual impact on your affordability is not that great, see below for some examples.
I’ve included a couple of potential mortgage scenarios below based on a $100,000 purchase price for simplicity sake. If you’re buying in the $200,00 range, double the numbers and if you are buying in the $300,000 range, triple it, and so on. Alternatively, if you want more specific figures, there are many great calculators available on the web, just make sure they’re applicable to Canadian mortgages.
The numbers below are based on a $100,000 purchase price with a 25-year amortization, based on a 5-year fixed term at 3.09%*.
Keep in mind the insurance premium figure can vary depending on downpayment and employment type, so talk to a mortgage professional for an accurate mortgage premium and mortgage payment amount.
Now: $2,613 insurance premium paid with $466 monthly mortgage payments.
After May 1st: $2,993 insurance premium paid with $468 monthly payments
Now: $2475 insurance premium paid with $442 monthly mortgage payments
After May 1st: $2,835 insurance premium paid with $444 monthly mortgage payments
Now: $2338 insurance premium paid with $417 monthly mortgage payments
After May 1: $2,688 insurance premium paid with $419 monthly mortgage payments
Most often, the only way to avoid paying an insurance premium is to have a downpayment higher than 20% of your purchase price. For those with less than a 20% downpayment, there are 3 mortgage default insurers in Canada. So far 2 of the 3 have announced their premiums will increase, and I’m sure we’ll shortly see the 3rd insurer announce they are following suit making the increased premiums the new industry norm. In my opinion, the announcement of the new mortgage insurance premiums is minor by comparison to what could have come down the pipeline, like increased minimum downpayment requirements or a further reduction in mortgage amortizations. The purpose of this new change is not to deter borrowers from buying; instead it should act as encouragement for any borrower to contribute a larger downpayment of their own in order to pay less of an insurance premium.
*5-year fixed rate available as of March 3, 2014, O.A.C. E & O.E.