Thursday, April 3, 2014

Changes to Mortgage Insurance Premiums

Are Canadian home buyers overextended? Federal Finance Minister Jim Flaherty thinks they are.

To cool the housing marketing and slow down the growth of household debt, his government has brought in changes to the availability of mortgage credit through the federal budget and to Canada Mortgage and Housing Corporation (CMHC).

Federal budget changes

The federal government’s budget, Economic Action Plan 2014, delivered on February 11, 2014 made the following changes:
Mortgage debt insurance: each year the federal government insures a set amount of mortgage debt. For 2014, the amount is reduced to $9 billion from $11 billion in 2013. 
Mortgage guarantees: each year the federal government limits the amount of loan guarantees that CMHC can provide to securitize mortgages. For 2014, loan guarantees decrease to $120 billion from $135 billion in 2013.
Private securitization: the federal government will bring in measures to tie government-backed insured mortgages to CMHC only. This means that government-backed insured mortgages will no longer be available to non-CMHC sponsored securitized investments. The goal is to reduce credit guarantees to small lenders, who can’t fund mortgages through their deposits only. This is a source of mortgage funding for many small lenders, and this change may result in higher costs for them.
What does it mean to securitize mortgages?
A lender providing mortgages sells those mortgages in a pool of investors. To facilitate the supply of mortgages lending in Canada, CMHC then guarantees the solvency of these investments by providing guarantees in the form of government-backed portfolio insurance.

CMHC changes

The federal government requires home buyers with a down payment of less than 20% to buy mortgage insurance.
CMHC is the largest provider of insurance in Canada and charges a percentage fee based on the mortgage amount and the loan-to-value ratio.
Effective May 1, 2014, CMHC will increase its mortgage loan insurance premiums. The increase will apply to mortgage loan insurance premiums for owner occupied homes and to 1-to-4 unit rental properties, including low-ratio refinance mortgages.
The increased premiums will also apply to owners who are self-employed. Increased premiums will not apply to mortgages currently insured by CMHC.

What will this cost home buyers?

According to the CMHC, the average Canadian home buyer requiring mortgage insurance will see an increase of approximately $5 a month to their mortgage payment. Below is an example of a $450,000 home.
Ratio with 15% 
Ration with 5%
Mortgage Financed$382,500$427,500
Current Insurance Premium$7,875$12,375
New Insurance Premium Effective May 1, 2014$8,100$14,175
Difference in Premiums$225$1,800
Increase to Monthly Mortgage Payment$1.12/month$8.98/month

*based on a 5 year term at 3.49% and a 25 year amortization 

To reduce taxpayer exposure to the housing sector

Since 2008 the Federal Government has adjusted the rules for government-backed mortgage insurance four times. Significant changes include:
  • requiring a minimum downpayment of 5%; and
  • establishing a maximum amortization period of 25 years for mortgages with a downpayment of less than 20%.
 (Source REBGV)