Effective May 1, 2014, the Canada Mortgage and Housing Corporation (CMHC) will increase its mortgage default insurance premiums. The news was released this morning, following the annual review of CMHC’s insurance products and capital requirements, and the increases to premiums are a direct reflection of CMHC’s increased capital targets.
Mortgage default insurance, which is mandatory in Canada for all high-ratio mortgages – those with down payments of between 5 and 19.99% – protects lenders, should borrowers ever default on their mortgage loans. The premium is a small percentage of your mortgage amount, which is then added back to your mortgage and paid off over the life of the loan.
This video explains how CMHC insurance is calculated:
On May 1st, the premiums we outlined in that video will go up, by approximately 15% on average, for all loan-to-value ranges. These increases will apply to new owner-occupied mortgages, self-employed mortgages and 1-4 unit investment property mortgages, and will not apply to mortgages that are currently insured by CMHC.
Some of the new premiums may look like a drastic increase, at first, but ”for the average Canadian homebuyer requiring CMHC insured financing, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment,” CMHC’s news release reported. “This is not expected to have a material impact on the housing market.”
For example, let’s say that today you bought a home with only 5% down, after which you needed to take on a $350,000 mortgage. Because you’re putting down between 5 and 9.99% of the asking price, your CMHC insurance premium would be:
$350,000 x 2.75% = $9,625
If you waited until after May 1st to purchase that same home, and still put down only 5%, your new CMHC insurance premium would go up to:
$350,000 x 3.15% = $11,025
With the new CMHC insurance rate, your premium would increase by $1,400 ($11,025 – $9,625), which would be added to your mortgage and paid off over the life of the loan. If you took out a 5-year fixed term at 3.49%, amortized over 25 years, your monthly mortgage payment would only increase by $6.991.
Even though mortgage default insurance costs homebuyers an additional percentage of their mortgage amount, it’s actually beneficial to the buyer market. Without mortgage default insurance, lenders would increase mortgage rates, because the risk of default would increase. Lenders are able to offer lower mortgage rates when loans are protected by mortgage default insurance, because the risk of default is spread across multiple homebuyers.
Going forward, CMHC says it will review their premiums on an annual basis, and plan to announce decisions on premiums in the first quarter of each year.