The Canada Mortgage and Housing Corporation (CMHC) plans to raise the cost of mortgage loan insurance for home buyers starting on March 17, 2017. This news is not surprising given that the Feds have been keeping a watchful eye on the overheating real estate market in Toronto and Vancouver for a while now.
If you remember, in the last quarter of 2016, the Federal government had tightened mortgage lending rules in hopes of stabilizing and cooling down the Canadian housing market. The new rules included:
- A stress test for all new insured mortgage applications that are high-ratio mortgages (i.e. where the buyer has less than 20% down payment). The home buyer seeking a high-ratio mortgage will now need to also qualify for a loan at the Bank of Canada’s benchmark rate (currently 4.64% on February 1, 2017) … a rate that is about 2 percentage points above what most individuals can currently negotiate.
- Restricting mortgage insurance to owner-occupied dwellings with shorter maximum amortization period, purchase price less than $1 million and a minimum credit score of 600.
- A maximum Gross Debt Service (GDS) ratio of 39% and a maximum Total Debt Service (TDS) ratio of 44%.
In general, home buyers in Canada with less than a 20% down payment are required to obtain mortgage default insurance. The mortgage default insurance is to protect lenders should a borrower default on their mortgage loan.
Currently, depending on how much the buyer borrows and the size of the down payment, i.e. loan to value ratio (LTV), they can expect to pay anywhere from 1.8% to 3.6% of the loan value as mortgage insurance premium.
The higher the LTV ratio (i.e. lower percentage of down payment), the higher the risk profile of the mortgage. Premiums on a mortgage loan when the home buyer has a down payment between 5% and 9.99% paid the maximum premium of 3.6% of the loan amount.
Under the new regime of premium rates starting on March 17, a home buyer with a down payment of 5% to 9.99% will now face a premium of 4%.
How much more in monthly mortgage payments?
According to CMHC, the average home buyer can expect to see an increase of approximately $5 per month on their mortgage payments. This estimate is based on the average CMHC insured mortgage loan of $245,000.
Using another example provided by CMHC, a new home buyer taking a mortgage loan amount of $350,000 and a down payment between 5% to 9.99%, can expect an increase of $6.59 per month on their mortgage payment. If they have a down payment between 10% to 14.99% and the same loan amount ($350,000), they can expect to pay approximately $11.52 more in monthly mortgage payments. On the same loan amount and a down payment between 15% and 19.99%, they will pay about $16.46 more a month under the new premium rates.
When the new rates come into force on March 17, home buyers with down payments higher than the 5% to 9.99% range, will see a larger increase in their monthly mortgage obligations compared to what they would have paid under the previous rates. The reason is obvious from the table above – the hike in premium rates is more pronounced as the LTV decreases.
Higher premiums a small price to pay?
Is the hike in premium a small price to pay when compared to the potential losses in equity that homeowners could suffer if the housing market becomes unstable and a crises ensues? Depending on which side of the market you are on, the answer could be either “Yes” or “No”.
At the rate house prices were rising in the Toronto and Vancouver markets, home ownership was moving out of the reach of middle class families. So, buyers in these markets are probably best served by any cooling in the housing market.
CMHC is of the opinion that the additional cost of mortgage insurance is not onerous enough to deter most first time home buyers. However, when you combine the impact of all the new rules, they could very well impact the mortgage amount that people are now going to qualify for, especially if they have the minimum 5% down payment.
The changes may cause some to postpone home ownership. If you are a homeowner trying to sell your house, it may be a little harder to get the price you want.
Home ownership is a significant investment activity that would benefit from good financial planning. First-time home buyers should do their homework by putting their finances in order, ensuring they are not over-stretching their resources and asking the right questions.
You want to scrutinize your family, financial, and job situation today and for the near future. Carry out your personal financial stress testing. if interest rates rise by 100 basis points, will I still be able to meet my mortgage obligations without becoming house poor? Tell A Friend