CMHC Premium Increase

So, you may or may not have heard about the recent announcement that the Canadian Mortgage and Housing Corporation (CMHC) has increased their insurance premium on new mortgages where the down payment is less than 10%. What does this mean for you?

Let's back up because not everyone knows what a "CMHC insured mortgage premium" is. If you do, congratulations, you may skip to the next paragraph! If you don't, then read on. As a home buyer, you have the option of putting as little as 5% of the purchase price as a down payment on your home. Any down payment smaller than 20% requires the mortgage to be insured by one of the Canadian mortgage insurance companies. The two big players are CMHC and Genworth. Of course, this comes at a cost. The less you put down, the riskier the mortgage is deemed to be, which makes sense. If you put down 20% on your home and I only put 5% down on my home and the market drops 10%, then I owe more on my house than it's worth, but you are still sitting on 10% equity. Make sense? So in order for the lenders to provide mortgages for these "risky" purchases, a person is required to have the mortgage insured. The smaller the down payment percentage, the higher the insurance premium. The insurance premium is a one time charge and it is tacked on to your brand new mortgage. For a more detailed (aka more boring) explanation, please visit the CMHC webpage

The current rate for a 5% down payment mortgage is 3.15% and as of June 1st, 2015 that rate will jump to 3.6%. This move is to create a larger capital reserve for the mortgage insurer. So any purchases after June 1st will have a higher premium, but also, the equity you have in your home will be less right out of the gate! Let's do some math; everyone loves math....

eg.) Lets use the current average home price of around $350,000 in Saskatoon.  

Purchase this home today:

Purchase price: $350,000

5% Down Payment: $17,500

Current Insurance Premium: $10,473.75

Equity in home the day you move in: $7026.25 or 2.01%

Purchase this home after June 1st, 2015:

Purchase price: $350,000

5% Down Payment: $17,500

Insurance Premium: $11,970

Equity in home the day you move in: $5,530 or 1.58%

In this case, it's an additional $1496.25.  Not horrible, but it's just another cost of buying that needs to be factored in. If you're thinking about buying in the fall rather than the spring, you may want to reconsider and save yourself a bit of money.

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