Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.
Last Friday Canada Mortgage and Housing Corporation (CMHC) announced that it will increase its mortgage-default insurance premiums, effective May 1, 2014. Current premiums will remain in effect on all mortgage applications that are submitted before this date, even in cases where the transaction closes well after the changeover deadline.
Bluntly put, the impact on the average borrower will be negligible.
To highlight what the typical impact of this change might look like with an example, let’s assume that a borrower is purchasing a $400,000 property with a $40,000 down payment, that the property will be used as his/her principal residence, and that he/she can qualify for financing using traditional underwriting guidelines:
- This deal has a loan-to-value of 90%, which means that our borrower’s high-ratio insurance premium will rise from 2.00% to 2.40% after May 1.
- In dollar terms, that extra 0.40% premium will increase the cost of insuring this borrower’s $360,000 mortgage from $7,200 to $8,640.
- If our borrower chooses to roll the default-insurance premium into the mortgage balance, as almost all borrowers do, the monthly payment on his/her five-year fixed-rate mortgage with a 25-year amortization and a rate of 3.09% would be increased by $6.88/month.
The chart below summarizes all of the coming changes to CMHC’s insurance premiums: