Canada's federal housing agency is hiking the cost of mortgage loan insurance for homebuyers starting March 17, as part of new regulatory requirements requiring it to hold more capital to offset risks in the country's red-hot real estate market.
Canada Mortgage and Housing Corp. (CMHC) said Tuesday it doesn't anticipate the increases will have a "significant impact" on homebuyers and expects the changes will add about $5 to a monthly mortgage payment for those with an average CMHC-insured loan of approximately $245,000.
But taken together with other changes recently put in place in an effort to cool down Canada's housing market, James Laird, co-founder of interest rate-comparison website RateHub, says the CMHC increase will have an effect on homebuyers, particularly those who will be purchasing property for the first time
"This is the latest in a long string of regulations brought down by the federal government making it more difficult to enter the housing market," said Laird, citing higher down payment requirements, higher qualifying interest rates and shorter amortization periods introduced last year.
"It's clear by the government's actions through 2016, and by this move, that they continue to be concerned about an overheating housing market. So once again, this is another move to make it more difficult to buy, which decreases demand and is attempting to slow down the appreciation of homes."
CMHC says the new premium changes are calculated based on the loan-to-value ratio of the mortgage being insured. The size of the increase in rates depends on that ratio.
For instance, new homeowners who make a down payment between 5% to 9.99% can expect an increase of $6.59 to their monthly mortgage if their loan is $350,000.
For the same loan amount, those with a 10% to 14.99% down payment face an increase of $11.52 a month, while those with a down payment between 15% to 19.99% will pay $16.46 more a month.
According to RateHub, a homebuyer in Toronto, where the average home price is $730,472, can expect to pay $20 more a month for their CMHC insurance premium if they have a $657,425 mortgage with a 10% down payment, based on a 25-year amortization period at a fixed five-year rate of 2.44%.
Laird says the last time the CMHC made changes to its insurance premiums was in June 2015, when it implemented a hike only on loans with a down payment of less than 10%.
These current increases seem to show that this time, they're spreading the increases more evenly across all types of loans.
Lenders typically require mortgage loan insurance when a homebuyer makes a down payment of less than 20%. The cost can be paid in a single lump sum, but CMHC says the amount is often added to the mortgage principal and repaid over the life of the loan.
Last year, the federal government introduced a number of measures aimed at curbing risk in the real estate market.
Most recently, Finance Minister Bill Morneau announced that stress tests will be required for all insured mortgages to ensure that borrowers would still be able to make their mortgage payments if interest rates rise or their financial situations change.
In 2015, Ottawa raised the minimum down payment on the portion of a home worth over $500,000 to 10%.
CMHC had previously predicted that home sales and the pace of new housing starts will decline this year before stabilizing in 2018.