Mortgage Default Insurance (commonly known as a “CMHC Fee”) is an insurance coverage that protects the Lender if you default on your mortgage. Traditionally, this premium allows people to purchase with less than 20% down payment saved.
Unfortunately, these premiums are about to have a substantial jump and this increase will affect all applications that are received on or after of March 17, 2017. As this affect applications, you can still take possession after March 17, 2017 and not be affected.
A QUICK LOOK AT THE CHANGES:
HOW MUCH WILL THIS AFFECT YOU?
As the premiums change when you put down 5%, 10%, or 15%, the first thing to determine is which category do you fit into?
1. For anyone putting down between 5% and 9.99%, premiums are increasing from 3.60% to 4.0%.
In other words:
• Loan amounts of $250,000, will see a mortgage payment increase of $4.70/month*;
• Loan amounts of $350,000, will see a mortgage payment increase of $6.59/month*; or
• Loan amounts of $450,000, will see a mortgage payment increase of $8.47/month*.
2. For anyone putting down between 10% and 14.99%, premiums are increasing from 2.40% to 3.10%.
In other words:
• Loan amounts of $250,000, will see a mortgage payment increase of $8.23/month*;
• Loan amounts of $350,000, will see a mortgage payment increase of $11.52/month*; or
• Loan amounts of $450,000, will see a mortgage payment increase of $14.81/month*.
3. For anyone putting down between 15% and 19.99%, premiums are increasing from 1.80% to 2.80%.
In other words:
• Loan amounts of $250,000, will see a mortgage payment increase of $11.75/month*;
• Loan amounts of $350,000, will see a mortgage payment increase of $16.46/month*; or
• Loan amounts of $450,000, will see a mortgage payment increase of $21.16/month*.
In addition to the above, for anyone using “Non-Traditional” Down Payment (ie. money borrowed from a Line of Credit or Loan), premiums are increasing from 3.85% to 4.50%.
*NOTE: All calculations were based on a 5-year term at 2.94% and a 25-year amortization.
For complete details on these premium changes:
CMHC Announcement January 17, 2017
ANOTHER WAY TO LOOK AT THIS INCREASE:
If you are purchasing a $350,000 property:
• With 5% down ($17,500), your insurance premium will increase 11.1% from $11,970 to $13,300.
• With 10% down ($35,000), your insurance premium will increase 29.2% from $7,560 to $9,765.
• With 15% down ($52,500), your insurance premium will increase 55.6% from $5,355 to $8,330.
WHY IS THIS HAPPENING?
Possible reasons for the above changes are:
• Our recession and high unemployment rates in Canada suggest there could be a possible increase in defaults. Like any type of insurance, the greater the risk, the higher the premiums will increase to offset new risk.
• Also, as much as it may not sound like the best news, increasing premiums will temporarily take some potential buyers out of the housing market, which may then slow the increase in houses prices and reduce the risk of a possible housing bubble.
POSSIBLE IMPACTS – PREDICTIONS:
1. The “CMHC Fee” is usually added to your requested loan amount and paid out with your mortgage over 25 years. Especially for those purchasing with 5% down (and definitely for those purchasing with alternative down payment), with a premium of 4.0% on the loan amount, you will now have just over 1% equity in your home to start. Unless you renovate, put down lump sum payments, or see significant increases in your home’s market value, it may take you longer to be in a position to sell as you will still have the same transaction costs (ie. Lawyer and Realtor fees).
2. Also, as mentioned in previous newsletters, many Lenders “bulk-insure” mortgages (including those that were processed with 20% down). As the premiums increase, “bulk-insurance” costs for these Lenders will increase as well. Unfortunately, what this means is that Lenders will recoup these costs by increasing interest rates, especially on the mortgages where the applicants have put 20% or more down and have NOT had to pay their own insurance premiums.
Although a 2.5% to 4% premium may seem quite high, it allows Canadians, who otherwise might not be able to purchase, to get their foot in today’s real estate market. Also, as it provides insurance to Lenders, without it, the risk of default would rise and therefore, mortgage rates would likely increase.
Also, Mortgage Default Insurance premiums, like many mortgages, are portable. This means that if you move to a new home, you may not be faced with a whole, new CMHC fee on your total loan amount. You may only need to pay a “top-up premium”. Albeit, this “top-up” will likely be at a higher rate but depending on the amount you’re topping up, this could save you thousands.
At the end of the day, if you have less than 20% available for a down payment, we’ve spoken and you already qualify, NOW may be the best time to buy! Alternatively, if you know you won’t qualify until after March 17, 2017, call me at 780-863-0700 to assess any changes to your mortgage qualification. Hope to hear from you soon!