By Mark Weisleder
If you have less than 20 per cent for a down payment on a property, you must obtain mortgage insurance.
Canada Mortgage and Housing Corp., the federal agency that insures mortgages, is raising its rates by an average 15 per cent on May 1.
Although this is not good news for homebuyers since it will add to the cost of many purchases, the overall impact isn’t disastrous.
If you have less than 20 per cent for a down payment, you must obtain mortgage insurance, either through CMHC or a private insurer such as Genworth Canada or Central Guaranty. The cost is typically added to your mortgage and paid over the 25 year amortized term.
The reason for mortgage insurance is that banks would likely not lend money to people who, for example, only have 5 per cent for a down payment, unless the mortgage is insured. CMHC essentially guarantees the loan to the bank so that if the borrower defaults and the property is sold at a loss, CMHC pays the difference. CMHC claims that they need to raise the premiums so that they have more cash in case more consumers default in the future.
For example, if you have a 5 per cent down payment today and want to borrow $300,000, the cost of mortgage insurance is 2.75 per cent or $8,250. You do not pay this up front. Instead, it is added on to your mortgage, so you would borrow a total of $308,250. Under the new rules, the rate would increase to 3.15 per cent, or $9,410, so you would borrow of $309,410 to net the same $300,000.
If you took a 5 year mortgage at 3.49 per cent interest today, your monthly payment would rise from $1,537 per month, to $1,543. This is an increase of $6 per month.
Some say that this could now make a home unaffordable for many first time buyers. I disagree. While no one likes an increase in costs, we are still in a period of historically low interest rates. Compare this to 1990, when interest rates were 12 per cent. The same mortgage would cost you $3,193 per month. In 2008, when the interest rate was 7 per cent, the payment would have been $2,167 per month.
Many believe that since CMHC is owned by taxpayers, we should not be in the business of protecting the banks, just so that more people can afford to buy a home. There are strong opinions on both sides of this issue.
It seems that every day someone else comes out with a prediction on the future direction of house prices in Canada. For every bank economist who says that we will still see stable growth over the next few years, there are others who predict a soft landing, with perhaps a price correction of 2 to 3 per cent. And then others predict that we are headed for a major price crash of 20 per cent over the next 5 years. All I know is that we have seen a period of steady growth in the Canadian real estate market for the past 14 years, despite many earlier predictions of crashes. Canada remains one of the most stable places in the world to live and raise a family.
For buyers, the main message is that you do not have to rush out and buy a home to beat the May 1, 2014 date when the mortgage insurance rates go up. It is more important to just make sure you can afford the home you are interested in and that you properly inspect any home before you buy it.
Mark Weisleder is a lawyer, author and speaker to the real estate industry. You can contact Mark at firstname.lastname@example.org