Effective March 17th, 2017 the Canadian Mortgage and Housing Corporation (CMHC) will be charging a little bit more for their mortgage loan insurance.
What Is Mortgage Insurance?
In Canada, any homeowner who puts less than 20% down on a home is required by law to pay mortgage insurance on top of their regular mortgage payments. Mortgage insurance is a fee borrowers must pay in the event they fail to pay their mortgage – protecting lenders from having to pay out on the default.
A homeowner’s mortgage insurance premium is determined by the amount borrowed calculated against the size of the down payment. Under the current rules, mortgage insurance fees can be as small as 0.6% or as large as 3.6% for borrowers with larger loans and small down payments.
For example, the average home price in Calgary is $480,000. When doing the math, it looks like this:
5% of home price ($480,000) = $24,000
mortgage insurance (3.6%) = $16,416
grand total: $456,000 + $16,416 = $472,416
With the new regulations, the CMHC will begin charging 4% on these types of loans. With the increase, the same $480,000 home with a 5% down payment will see a mortgage insurance premium of $18,240 ($456,000 x 0.04). In short, this is an increase of $1,824 over the lifetime of the loan (approximately $6 per month over a 25-year period).
Who Does the Change Affect?
The increased amount will vary per borrower – depending on the size of their loan and the amount of existing equity they have. According to the CMHC, the average mortgage loan in Canada is approximately $245,000, which works out to an additional $5 per month for the average borrower.
Loans of $350,000 can expect to see an increase of around $11.50 per month, and borrowers in the $450,000 range will see an additional $15.
The new rates will only impact those applying for a mortgage on or after March 17th. Borrowers who have already applied or homeowners with an existing mortgage will not be affected.
The increase in mortgage premiums is part of the federal government’s initiative to reduce risk and volatility in the Canadian housing market. For more information, check out our post: Mortgage Rules Are Changing: Here’s What You Need To Know to see how these changes might impact you.