Canadian home buyers with small downpayments face a hike in mortgage insurance premiums next week. But market watchers say the increases likely won’t be enough to slow sales in what has lately been a hot housing market in many areas, helped in large part by historically low mortgage rates.
In February, CMHC announced it would hike premiums for default insurance by an average of 15 per cent effective May 1. The increase would hit buyers who have a downpayment of less than 20 per cent. Soon after CMHC served notice of the increase, private sector competitors Genworth Canada and Canada Guaranty matched the increases.
The increases will only affect new policies, not mortgages already in existence. The highest premiums are paid by those who put down just five per cent of the home’s purchase price. At that level, the mortgage insurance premium rises from 2.75 per cent to 3.15 per cent.
On a $450,000 mortgage at 3.49 per cent amortized over 25 years, the insurance fee would rise from $12,375 to $14,175. While $1,800 sounds like a big increase, it can be financed over the life of the whole mortgage , so the monthly cost of the insurance premium in this case would rise by less than $9 a month. CMHC estimates that for the average buyer needing insured financing, the new rates will add about $5 a month.
To be eligible for the lower mortgage insurance premiums, lenders have to submit their requests for mortgage loan insurance before May 1. The closing date of the home purchase is not the determining factor.
Also, as of May 30 CMHC will no longer insure purchases by self-employed workers without third party income validation, and will offer no insurance Canadians seeking to purchase a second property.
Self-employed Canadians can still qualify for CMHC insurance, but must be able to provide proof of their income levels, the agency said. CMHC estimated the changes would effect less than three per cent of the units it insures. Given the limited use of these products, their discontinuation is not expected to have a material impact on the housing market, the agency added.
CIBC deputy chief economist Benjamin Tal said the move was not a surprise, adding that more changes are likely coming to reduce the agency’s footprint in the market.
The Finance Department has tightened mortgage rules on four separate occasions in the past several years – along with requiring stricter enforcement and management of loans – in an effort to weed out marginal buyers and excessive speculation in the housing market.
Former finance minister Jim Flaherty had also expressed concern that CMHC had become too large a player in the market, needlessly exposing Canadian taxpayers to risk should there be a housing crash. The agency currently has about $560 billion in outstanding mortgage insurance on its books.
Flaherty and the Bank of Canada have for several years expressed concerns that too many Canadians risked becoming over-extended in the mortgage markets, especially once interest rates begin to rise.
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