The Canada Mortgage Housing Corporation is hiking the cost of mortgage insurance for homebuyers March 17 – just one more piece of regulatory requirements requiring homeowners to hold more capital to offset risks in the stubbornly hot real estate markets in pockets of the country.
The increases apply to those who require insurance when they don’t have a 20 per cent down payment. This alone isn’t expected to have an impact on the market but when coupled with other changes it could start to add up. In the past year, higher down payment requirements on a portion of a home worth over $500,000 to 10 per cent, and the decrease in amortization – and now an increase in the cost of mortgage insurance. Put it all together and there will be some, especially first time homebuyers, having to sit on the sidelines a little longer.
The actual increase in insurance premiums isn’t all that much and is calculated on the loan-to-value of the mortgage being insured. At a minimum, the changes will add about $5 to a monthly mortgage of a CMHC insured loan of approximately $245,000.
But that’s not all, the quarter-point increase in the U.S. Federal interest rate typically results in the same increase for fixed-rate mortgages here in Canada, which we should expect to see in the coming weeks. According RateHub, based on the average Canadian home price of $519,521 (according to CREA) with a minimum down payment of 5.2 per cent (or $27,015) and a five-year fixed rate of 2.49 per cent, the total monthly mortgage payment would be $2,283. With a 0.25 per cent rate increase, that monthly mortgage payment would be $2,347, an increase of $64 per month.
With this rate increase coming the same week higher mortgage insurance premiums take effect for Canadian homebuyers, it will add to a prospective buyer’s total monthly carrying costs and making the mortgage amount a buyer can qualify for incrementally less.
An increase like this in the U.S. does place more pressure on the Bank of Canada to make a move, but for now RateHub still expects to see our key overnight rate remain at 0.5 per cent until 2018.
If that remains true, a fixed rate increase will widen the spread between fixed and variable rates in Canada so you can expect variable rates to rise in popularity in 2017.
According to RateHub’s Digital Money Trends Report, popularity of variable-rate mortgages, which has risen for three consecutive years, decreased in 2016 by 12 per cent to just 30 per cent of all rate requests on RateHub.ca. This was in part due to the declining spread between fixed and variable rates in 2016.
As costs continue rise for homebuyers, you have to wonder if the intended consequences will in fact slow down the real estate market? As we wait and see my bet is the variable mortgage will the one area homeowners for now, can save a little money.