Canada Mortgage & Housing announces another rate hike.
Effective June 1st, 2015 their “mortgage loan insurance premium for homebuyers with less than a 10% down payment increased by approximately 15%.”
Premiums for homebuyers with a down payment of 10% or more are not affected by this announcement and neither are homeowners with current mortgages. Those premiums will remain the same as they are now.
So What is the Effect?
As an example, a qualifying buyer has a minimum down payment of 5%. The mortgage amount is $225,000 at a 5-year fixed rate of 2.69% and an amortization of 25 years. The premium is calculated as a percentage of the mortgage amount. Though it can be paid up front, typically the lender pays CMHC and the premium is added to the mortgage principle and amortized over the life of the mortgage.
At the current premium rate of 3.15%, the insurance works out to $7,087.50. The mortgage now totals $232,087.50 and the monthly payment works out to $1,061.76
Effective June 1st, the premium will increase to 3.60%. So $8,100 will be added to the same mortgage totaling $233,100, an increase of $1,012.50. The monthly payment now works out to $1,066.39.
The Difference is Slight: only $4.63
In the forgoing example, the increase in monthly payment is only $4.63. This falls within the statement made by CMHC that, for the average Canadian, the premium hike will result in an increase of about $5 monthly, small enough that it will not impact housing markets.
- On applications submitted to CMHC prior to June 1st the current premium will apply regardless of the closing date of the transaction.
- The increase applies to housing with 1 or 2 units with less than 10% down.
- In 2014 the average loan at 95% was $252,530. This is the amount that results in a $5 increase to the monthly payment.
- Private Insurers, Genworth and Canada Guarantee, are following the CMHC lead in increasing the premium.
What about Ontario Sales Tax on the Premium?
Mortgage insurance has always been subject to Ontario sales tax at the rate of 8% payable on closing. Continuing with the example above, a buyer would need $648 on closing (an additional $81 with the premium increase) besides other closing costs to cover the tax payable.
This tax is often overlooked by buyers who can find themselves scrambling to come up with the additional amount as the sales tax cannot be added to the loan amount.