Guest Blog by Ryan Bond of Jencor.
June 4, 2013
Just when we thought the government had taken a break from changing the rules on us, the Canadian Mortgage and Housing Corp (CMHC), the federal Crown corporation that administers the National Housing Act (NHA) and insures mortgages for lenders, announced last month that effective May 1, 2014 it will be raising their mortgage loan insurance premiums by an average of 15% on all loan to value ratios. As suspected, Canada Guaranty and Genworth Canada, the other two Canadian mortgage insurers have both followed suit.
What exactly is mortgage loan insurance you ask? It protects lenders against borrower default and is required for all mortgages where less than 20% of the purchase price is placed as a down payment. Premiums can be paid by the borrower in one lump sum, but are more often amortized over the life of the loan and added to the borrowers' monthly mortgage payments.
While it's true that mortgage loan insurance protects the lender in the case of borrower default, the upside is that it also allows borrowers to purchase homes with less than a 20% down payment and obtain financing of up to 95% of the value of the home - ultimately making home ownership an attainable reality for more people.
So what does this increase mean for borrowers who currently have insured mortgages? Thankfully - nothing at all. The new rates will not affect mortgages currently insured by CMHC, and mortgage applications submitted prior to May 1st will be subject to the existing rates (same goes for mortgages insured by Canada Guaranty and Genworth Canada). However, any applications received on or after May 1st will be subject to these new, increased premiums.
What's important to remember is that, while this may seem like yet another money grab on behalf of the government, its impact on monthly payments made by home owners will end up being quite minimal. For instance, borrowers with a $250,000 mortgage with a LTV of 95% will see a mere $7 increase to monthly mortgage payments (think 2 Starbucks premium coffees).
While I too, roll my eyes and groan in frustration along with current and prospective home owners, in response to these increases - truthfully I see no need for real panic or any reason for potential home owners to abandon the dreams of home ownership.