Mortgage loan insurance helps protect lenders against mortgage default and enables consumers to purchase homes with a minimum down payment of 5% with interest rates comparable to those with a 20% down payment. Mortgage loan insurance is typically required by lenders when home buyers make a down payment of less than 20% of the purchase price.
CMHC mortgage loan insurance premium is calculated as a percentage of the loan based on the loan-to-value ratio. The premium can be paid in a single lump sum but more frequently is added to the mortgage principal and amortized over the life of the mortgage as part of regular mortgage payments.
Effective 1st May, 2014, CMHC is on an average increasing 15% of their rates. The increase applies to mortgage loan insurance premiums for owner occupied, self-employed and 1-to-4 unit rental properties, including low-ratio refinance premiums. This does not apply to mortgages currently insured by CMHC. The Chart below will give you exact percentage of increase to various categories:
For example, if you have a 5 per cent down payment today and want to borrow $300,000, the cost of mortgage insurance is 2.75 per cent or $8,250. You do not pay this up front. Instead, it is added on to your mortgage, so you would borrow a total of $308,250. Under the new rules, the rate would increase to 3.15 per cent, or $9,410, so you would borrow of $309,410 to net the same $300,000.
Some say that this could now make a home unaffordable for many first time buyers. I disagree to this myth. While no one likes an increase in costs, we are still in a period of historically low interest rates. Compare this to 5 years back rates in year 2008, when the interest rates were as high as 7 per cent, compared to current standard 5 years rate of 3.49%. If we were doing good at that time, then what we have now is far better!
Some believe that since CMHC is owned by taxpayers, we should not be in the business of protecting the banks, just so that more people can afford to buy a home. It is like saying cut the chicken and expect the eggs. It seems that every day someone else comes out with a prediction on the future direction of house prices in Canada. For every bank economist who says that we will still see stable growth over the next few years, there are others who predict a soft landing, with perhaps a price correction of 2 to 3 per cent. And then other real “EXPERTS”, who are predicting that we are headed for a major price crash of 20-25% since the market crash of 2008. In these last 5 years, I have seen these inflated predictions every year…..multiple times. But fact is that when nothing happens each year, as they though, they predict something else for following year. All I know as being in front line is that we have seen a period of steady growth in the Canadian real estate market for past decade…..year after year, with few exceptions of minor corrections, which I think are always healthy for any Real Estate Market.
We can’t ignore the fact that Canada still remains one of the most stable places in the world to live and raise a family with very conservative real estate market and lending guidelines. This effort of CMHC is again one more effort of Canadian housing system to raise our protection walls against any such odds. If you are in the categories which have higher premiums, common sense says…….you got to rush to save. Closings can happen later but deal has to be finalized before end of April 2014. Home sellers shall also bank on this situation as they can expect good prices for their houses in April, so listing is definitely a GO too.