CMHC Mortgage Insurance Premiums to Increase

CMHC Mortgage Insurance Premiums to Increase

Starting May 1st, 2014, it will cost home-buyers buyers with less than a 20 per cent down payment a little bit more to purchase a home. The Canada Mortgage and Housing Corporation (CMHC), which provides the lion’s share of mortgage insurance, announced plans to increase insurance premiums on high-ratio mortgages for the first time since the late 1990’s.

Home-buyers with down payments between 5 and 19.99 per cent will see their premiums rise; effect May 1st, premiums will range from 0.6 to 3.15 per cent, up from the current rates of 0.5 to 2.75 per cent. Buyers with the minimum down payment of 5 per cent will be hit the hardest – they will see an increase of 0.4 per cent.

What is Mortgage Insurance?

Although home-buyers may grumble about paying mortgage insurance premiums, it’s actually a good thing. Mortgage insurance allows home-buyers with less than a 20 per cent down payment obtain residential mortgages at competitive rates. If it wasn’t for mortgage insurance, you’d have to pay higher mortgage rates on high-ratio mortgages – the bottom line is you’d still end up paying out of pocket in the end.

How Much Will the Increase Cost Me?

Home-buyers will see an average increase of 15 per cent on their mortgage insurance premiums, according to CMHC. This translates to an average increase of about $5 on monthly mortgage insurance premiums.

To see how much the new premiums will cost you, let’s run through an example. If you purchase a home for $500,000 with a 5 per cent down payment ($25,000), you’ll require a mortgage of $475,000. Before the changes, with mortgage insurance premiums added on as a lump sum to your mortgage, your total mortgage would be $488,063 (assuming 2.75 per cent premiums); after May 1st, your total mortgage would be $489,996 (3.15 per cent), an increase of $1,933 on your total mortgage. Two thousand bucks may seem like a lot, but over the life of your mortgage you’ll hardly feel the pinch. Although it will cost home-buyers a little bit more, this change isn’t expected to have a dramatic effect on the housing market.

Am I Affected By The CMHC Changes?

If you’ve recently purchased a home or are in the market for one and you have less than a 20 per cent down payment, you can avoid paying the new insurance premiums by closing before May 1, 2014. If you’ve saved up a down payment of 20 per cent or more, you won’t be affected by these changes. If you already own a home you can breathe a sigh of relief – these changes will not affected existing mortgage insurance policies.

Why is CMHC Increasing Home Insurance Premiums?

There’s been a lot of talk about a housing bubble in the Canadian housing market. Although we’ve been warned countless times our real estate is overvalued, we have yet to see a significant slowdown. With the overnight lending rate – the rate mortgage lenders base their prime rate on – frozen at 1 per cent since September 2010, home-buyers are able to up the ante and spend more on homes. This has helped lead to home prices jumping across Canada.

As the average Canadian house price has skyrocketed over the last decade, reaching $389,119.00 in December 2013, it has left CMHC more exposed to the housing market. If we saw a U.S.-style crash in the housing market, the CMHC would be left vulnerable. These changes will help reduce the exposure of taxpayers, who help fund the crown corporation, according to CMHC. This comes on the heels of a major shakeup at CMHC, which capped its mortgage insurance in the summer of last year.

Mortgage insurance premiums aren’t set in stone. We could see future increases – or decreases in the mortgage insurance premiums. CMHC plans to review mortgage insurance premiums each year and announce any changes in the first quarter going forward.

via:http://www.housingblock.com/blog/cmhc-mortgage-insurance-premiums-increase/?utm_source=rss&utm_medium=rss&utm_campaign=cmhc-mortgage-insurance-premiums-increase