CMHC Increases Mortgage Insurance Premiums
On February 28th, CMHC (Canada Mortgage and Housing Corporation), Canada’s national housing agency, announced that it will be increasing mortgage loan insurance premiums, effective May 1st, 2014. The change does not apply to existing homeowners with existing mortgages. It will only apply to applications for mortgage insurance made after May 1st – so if a home buyer applies for insurance prior to May 1st for a purchase which closes after May 1st, they will be subject to the lower premiums.
CMHC insures roughly 70% of the mortgages in Canada, according the National Post. The other mortgage insurers are Genworth Canada and Canada Guaranty, both private insurers. Genworth also confirmed that it will be increasing its mortgage loan premiums, also effective May 1st.
Background on Mortgage Insurance
By way of background, Canadians must purchase mortgage insurance if they are buying with less than 20% down payment and if their loan is coming from an institution regulated by the Bank Act. This insurance essentially covers the lending institution, in case the borrower/home owner defaults on their mortgage & the lending institution passes the cost onto the homebuyer. It also enables a homebuyer with a smaller downpayment to get access to lower interest rates from the lending institution. The premium calculation is based on a % scale applied to the loan amount, and the % itself is based on the loan to value ratio. Since CMHC is a federal housing agency, the mortgages are in effect insured by the Federal government and therefore ultimately the taxpayer.
The mortgage insurance is typically added onto the mortgage and amortized over the term of the mortgage loan, so home buyers tend not to feel the impact as much. CMHC has noted that they believe the impact of the increase will be in the region of $5/m for the average homebuyer.
Potential Impact of the Change
Some analysts speculate that there may be a boost to sales prior to the May 1 implementation date, but the impact is difficult to forecast at this time, & CMHC itself does not believe there will be a material impact.
Current CMHC Insurance Premiums vs. New Premiums
The table below, sourced from CMHC, shows the current premium and the new premium – based on loan to value ratio. Please note that the table below does not apply to self employed purchasers without 3rd party income validation.
|Loan-to-Value Ratio||Standard Premium (Current)||Standard Premium (Effective May 1st, 2014)|
|Up to and including 65%||0.50%||0.60%|
|Up to and including 75%||0.65%||0.75%|
|Up to and including 80%||1.00%||1.25%|
|Up to and including 85%||1.75%||1.80%|
|Up to and including 90%||2.00%||2.40%|
|Up to and including 95%||2.75%||3.15%|
|90.01% to 95% – Non-Traditional Down Payment||2.90%||3.35%|
Why did CMHC apply this change?
This change was more than likely applied as part of a periodic review of the CMHC’s risk pricing and risk management policies. Since it is acting as an insurer, CMHC must ensure that it is properly pricing risk. It has made changes before - as an example, prior to 2007, CMHC had a policy where 25% was the minimum downpayment to avoid paying mortgage insurance. That was then adjusted to 20% in 2007. Keep in mind that CMHC has caught the attention of global institutions. Just last year, the IMF (International Monetary Fund) recommended that Canada consider reducing the number of mortgages insured through CMHC and cited overall Canadian debt levels in its statements. So this change is not surprising and in my estimation, it will have a negligible impact on the Canadian housing market in 2014.