Mortgage Insurance Costs Rise…Again

Buying a home with less than 20% down? The government’s about to milk you for a few more grand.

Come March 17, CMHC is boosting its default insurance premiums for the third time in three years. Here’s what they’re rising to, based on down payment size:

• Less than 10% down:                           +0.40% to 4.00%
• Between 14.99 and 10% down:          +0.70% to 3.10%
• Between 19.99 and 15% down:          +1.00% to 2.80%

And if you borrow your down payment, you’ll pay even more: 4.50% of the mortgage amount (that’s up 0.65%-pts versus current premiums, and up 1.60%-pts since 2013). That’s a downer for all those B.C. buyers who planned to use the province’s new equity assistance loans.

For someone buying the “average” $470,661 home with 5% down, CMHC’s increases amount to over an $8 hike in monthly payments, according to the Spy’s trusty mortgage calculator. Over the first five years, that’s another $2,000+ out of Joe Borrower’s pocket. Recall that CMHC has already hiked premiums significantly since 2014.

The nation’s top insurer attributed the premium hikes mainly to the banking regulator’s (OSFI’s) January 1 capital requirement increases. But that wasn’t the only reason.

“Our premiums do not match capital [changes] perfectly but are a function of a variety of factors including access to funds for lending, the distribution of our insurance volumes, competitive factors, financial stability, and results of our continuously evolving models and risk-management practices,” a CMHC spokesperson told the Spy.

Another factor is the anticipated jump in demand for borrowed down payments, again thanks to programs like B.C.’s down payment loans. Steven Mennill, Senior Vice-President, Insurance, said he expects the borrowed down payment program to be “used more going forward than it was previously,” which led (in part) to CMHC boosting these premiums specifically.

As for any fallout, here’s what mortgage shoppers can expect:

• As usual, expect a small group of buyers to rush into the market before the implementation date, but no earth-shattering effect on home sales.
• The lowest rates could rise again in March. That’s because some of the most competitive lenders are currently using what’s known as “transactional low-ratio insurance” in order to insure their mortgages and securitize (resell them to investors). But this cost will rise in March, forcing these lenders to use a different type of insurance called “bulk insurance.” The problem is, the cost of bulk insurance just soared January 1 (it’s now more expensive than transactional insurance). Is that confusing enough? Long story short, lenders will pass through higher funding costs to consumers on March 17. This won’t have a huge impact on rates industry-wide, but it will jack up rates at the margin by maybe 10+ basis points in many cases. That’s over $900 more interest on an average-sized mortgage.
• A miniscule number of borrowers will no longer qualify for the mortgage they want since these higher premiums push their mortgage amount, and hence debt ratios, beyond the federal limits. This is no big deal as people living that close to the margin are red flags, and should be in smaller mortgages anyway.
• Strangely enough, premiums are rising the most on less risky mortgages. “Low-ratio” mortgages in the 75.01% to 80% loan-to-value bracket get hit the hardest, so you can expect the greatest loss of competition to occur in this segment of the market.
• Rates for borrowers putting down the least are actually dropping. That’s because lenders who can’t compete on low-ratio mortgages are battling for more share of the high-ratio space. These are coveted mortgages since the borrower pays the premium, not the lender.