Asof June 1st, 2015, the CMHC – Canadian Mortgage and Housing Corporation – is changing mortgage loan insurance premiums. For homebuyers who are making less than a 10% down payment, their premiums will increase by about 15%.
What is mortgage loan insurance?
Mortgage loan insurance is a tool instated to protect lenders against mortgage default. This insurance also helps buyers purchase homes with minimum down payments – as low as 5% – and interest rates that mimic those who put down 20%. Most lenders require mortgage loan insurance in cases where buyers want to put down less than 20% of the home’s purchase price.
How are mortgage loan insurance premiums calculated?
The CMHC calculates these premiums as a percentage of the loan in relation to the loan-to-value ratio. You can pay your premium as a lump sum but it usually is tacked on to the mortgage principal allowing you to pay it over the life of your mortgage.
Who will be affected by this change?
If you plan on buying a house after June 1st, 2015, you will be directly affected by this change. However, that doesn’t mean this isn’t a good time to purchase a home. The increase to mortgage loan insurance premiums pertains to traditional housing where 1-4 units make up the property –apartment complexes are exempt – and less than 10% is made for a down payment. This will result in an increase to your monthly mortgage payment of about $5. This amount will vary depending on each individual case, but it’s safe to say that the extra cost to your payments will not be astronomical.
How will this increase affect the Canadian housing market and the average borrower?
According to the CHMC, the Canadian housing market will not suffer. The impact – if any – will be minimal and the average Canadian homeowner won’t see a difference. If you have purchased a home prior to June 1st, 2015, and it has already closed, you are in the clear. Your monthly mortgage payments will not be disturbed by the increase. Conversely, if you purchase a home after the date of change occurs, and only wish to make a down payment of less than 10%, you will directly be affected by the increase.
What can I do to avoid this increase?
If possible, make a down payment of at least 20%. Sometimes this is easier said than done and it might be worth it to make a lower down payment and pay the extra $5 per month on your mortgage. For example, you could only end up paying $1,500 more over the life of a 25-year mortgage, which may not even put a strain on your finances. A mortgage specialist will tell you whether this is the right option.
Do not let the CMHC’s changes deter you from buying a home. A good mortgage broker will help you make the home buying process as painless as possible.
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