On April 2nd, 2015 the CMHC conducted its annual review of the various products and services that it offers and it found that the largest group of defaulting mortgages is those who put a down payment of less than 10%. With these findings, they now have decided to increase once again the amount charged to home buyers. This is an attempt to offset the losses that have been incurred by the default rates of this category of home buyer.
As a result, we will see insurance rates increase as early as this summer, June 1st to be exact. The insurance rates will go up on all mortgage requests with down payments of less than 10% as well as on mortgage requests that have Non-Traditional down payment confirmation.
The short-term impact of this increase, although minimal, can have a long-term undesirable impact on one’s bottom line. If you visit CMHC’s website they try and spin it as it will impact the average home buyer by about $5 per month, however when you look at the bottom line, you can see that the impact is far greater.
First, let us take a look at what it means and how the historic insurance premiums have gone up. Prior to May 1st, 2014, the standard premium for a mortgage with a down payment of less than 10% was 2.90%. We saw this increase from 2.90% to 3.15% on May 1st, 2014. The new premium came as a shock to most homebuyers and mortgage professionals alike. As we move to June 1st, 2015, we are looking at a new increase, now taking the rate from 3.15% to 3.60%. This translates to an increase from a premium of 2.90% to 3.60% that is an increase of 31%.
CMHC is claiming that this increase is taking effect because it has the largest losses in the category of buyers putting less than 10% down payment, however, what they are not mentioning is that this is the largest category of buyers PERIOD. It is therefore obvious that if you look at default rates, the majority would end up in that category as this is the largest group of people buying.
How will this impact the average consumer and what it means to peoples bottom line
If we look at an average mortgage of $275,000 on a 25year amortization and at a 5year fixed rate of 2.59% here is the result.
This means that the premium as of June 1st will cost you $2,337.50 more versus only a year ago. Not to mention, if we factor in an average interest rate over the life of your mortgage of about 5.5%, additional to your premium, the interest you will pay on amortizing this increase translates to $1,942.87, totaling a long-term effect of $4,280.37.
The largest immediate impact of this change will be seen on the taxes payable on the CMHC premium (9% tax). This tax amount is due at notary and cannot be amortized over the life of the mortgage. Compared to only one year ago, this amount was $210.00 less. This means that the average consumer is now faced with an extra amount that they must bring to a notary to cover taxes on the premium. Further to this, we see an increase in payments of $10.58 per month this translates to an extra $634.80 over the first term of the mortgage.
If you are currently in the market to purchase a home, it is important to keep all these changes in mind and plan accordingly. If you find a home prior to June 1st and the mortgage request is submitted to CMHC prior to this date, the old premium table will apply. If you make your mortgage request after July 1st, then you will be forced to pay the larger premiums.
As always, if you have any questions or comments for this article please feel free to contact me by phone at 514-680-4674 or by email at firstname.lastname@example.org
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