Please read on for a guest blog this month from mortgage broker Chris O’Sullivan!
CMHC recently raised their mortgage default insurance premium rates. You may not be familiar with mortgage default insurance but if you have purchased a house and had less then 20% as a down payment, you probably already have it!
There are three companies that dominate the mortgage default insurance industry in Canada:
1) CMHC (Canada Mortgage and Housing Corporation) is a government-owned corporation. It is the premier provider of mortgage default insurance (65% of market share).
2) Genworth is the leading private supplier of mortgage default insurance in Canada but was founded in Virginia (30% of market share).
3) Canada Guaranty is a Canadian-owned private mortgage default insurance company (5% of market share).
It is important to understand that mortgage default insurance does not protect you as the borrower. Its sole purpose is to protect the lender if the borrower defaults on their mortgage payments (i.e. is not able to make their payments).
On the other hand, regular mortgage insurance does protect the borrower from failing to make their payments due to events such as a disability, illness or death. With mortgage insurance, I would recommend using an insurance broker to source this product, since banks tend to overcharge for the amount of protection that you get.
Borrowers that pay less than 20% as a down payment for a home purchase in Canada have to take mortgage default insurance. The premium for this insurance is added to the borrower’s mortgage payment each month. Although your monthly payment increases, it is generally a small amount and it does allow (especially first-time) buyers to get into the real estate market without having to save up such a large amount of money for a down payment.
For example, the benchmark condo price in Calgary is currently $283,400. Without mortgage default insurance, you would need to save up almost $57,000 for a 20% down payment. Instead you can put down just $14,170, a much more palatable number for young home buyers.
It is interesting to note that mortgage default insurance is not available for purchases over $1,000,000.
Last week, CMHC increased their mortgage default insurance premiums by 0.10 to 0.40 percentage points. These are for borrowers that can verify their income. Premiums for borrowers that state their income and can’t or don’t verify their income will see an even higher hike in premium.
For the average home buyer, this premium increase makes home buying $992 more expensive. In 2013, the average insured mortgage in Canada was $248,000. This premium increase will raise a homeowner’s monthly payments by about $5.
The impact of this will be even more negligible if you put down a down payment between 15% – 19% of the cost of the home. The extra premium will be about $125 total, for a $250,000, 25-year mortgage at 3.49%.
The primary reason for this increase in premium is how expensive houses are getting (the higher the mortgage amount, the more the insurer has to pay out if a borrower defaults). The last time the premiums were increased was in 1989! It is expected the other two insurance companies will also raise their premiums.
For home owners that already have a mortgage, this increase won’t affect them unless they renew, refinance, or purchase a new home and put less than 20% down. This increase shouldn’t affect the housing market.
Here are a few other key points about this CMHC premium increase:
1) CMHC fee increase applies to owner-occupied, self-employed and one-to-four-unit rental property applications.
2) Those submitting applications before May 1, 2014 receive the existing lower premium.
3) Possession date will have no effect on the premium.
4) CMHC will start announcing any premium changes at the first quarter of every year.
I hope this has helped explain the premium increase and what it may mean to you. I work in the Axiom mortgage network. If you have any further questions or would like to talk about your own specific mortgage situation, please email me and I will be more than happy to answer all of your questions. I return emails within two hours.
I work with all types of borrowers but I specialize in working with the following groups: Self-employed business people, contractors, salespeople that get paid commissions, real estate investors, employees that receive bonuses.