Canada's national housing agency has increased the amount of money that homeowners with less than 20 per cent down payments must pay to insure their mortgages.
Starting in May, the housing agency will charge an average of about 15 per cent more to insure mortgages, CMHC said in a release Friday.
Prior to the announcement, the premiums ranged between 0.5 per cent and 2.75 per cent. Under the new rules, they will range from 0.6 per cent to 3.15 per cent.
The changes are unlikely to have a major impact on the housing market, but in real-dollar terms, the move makes it incrementally more expensive to buy a home. A heavily leveraged buyer — someone with only five per cent down, and therefore borrowing 95 per cent of the home's value — would be most impacted by the hike, but even then not in a significant way.
Under the old system, that borrower would pay an insurance premium of $6,875 to get a $250,000 mortgage. Under the new system, their premium would jump by $1,000 to $7,875. On a typical 25-year mortgage at 3.5 per cent, that person would be paying about $5 more on their mortgage payment, every month, to pay down the fee.
Homebuyers in Canada are legally required to purchase mortgage insurance if they don't put down 20 per cent of the price of the home up front. The homeowner pays for the insurance, but the lender is the beneficiary — it covers their losses if the homeowner defaults.
The vast majority of that insurance is sold through CMHC, although some private companies also offer it. Those companies. including Genworth Financial and Canada Guarantee tend to match whatever taxpayer-backed CMHC is charging.
Genworth shares jumped up by more than one per cent on the TSX following the news, a day after they gained more than three per cent as rumours of what CMHC was planning leaked out. Higher premiums mean more revenue for the insurer, which investors like.
CMHC charges a percentage fee for its insurance policies in the very low single-digits. Those percentages haven't been raised since the late 1990s, and were in fact lowered from 2003 until 2005.
"The higher premiums reflect CMHC’s higher capital targets” CMHC vice-president Steven Mennill said in a release. “CMHC’s capital holdings reduce Canadian taxpayers’ exposure to the housing market and contribute to the long-term stability of the financial system.”
The increase will only affect new policies, not mortgages already in existence.
CMHC said the new rules will apply to owner-occupied units and one-to-four-unit rental properties. It will also apply to self-employed owners.