Planning to buy a new home in the next few months?  If you’ve been budgeting for a low down payment – say five to ten percent – you’d better get educated on the CMHC premium increase announced today.  Click here to get the facts about the increase, which will become effective May 1, 2014.

What is mortgage default insurance?

If you’re buying a home and need a mortgage with less than 20% down, your mortgage is considered to be a little more risky than if you have a bigger down payment.  In order for the mortgage lender to still feel comfortable lending to you, they will ask either CMHC, Genworth, or Canada Guaranty to insure your mortgage loan.  If you default on paying your mortgage, one of these insurers will reimburse your mortgage lender for any losses.

Who pays the premium?

The premium is paid by you, the borrower, and is based on a sliding scale.  The more money you put down, the smaller your premium, percentage-wise, will be.  Because the amount can be sizeable, you are able to bundle it into your mortgage, and all you’re responsible for paying at the time of closing is the HST on the premium – it forms part of your closing costs.

Who will be affected?

The biggest impact is on people who are planning to make a down payment of only 5 or 10% of their home purchase price.  The premium is increasing from 2.75% to 3.15% for people with a five percent down payment, and from 2% to 2.4% for those planning to put 10% down.  The changes are much smaller if you’re putting down more than 10%.

What is the timing of the default insurance rate increase?

As long as you purchase a home before May 1, 2014, and your application is submitted both to your lender and to CMHC before May 1st, you will still be eligible for the old rates.  So, to clarify, even if you purchase a home and your closing date is after May 1st, as long as you got the mortgage application submitted on a specific property before May 1st, you’ll get the old rates.

My thoughts?

I’m a little disappointed – there is already so much pressure on first-time homebuyers in the greater Toronto area.  But it could have been worse.  The impact on the average mortgage is about $5 per month, and for the people wanting to put down only 5%, the average cost increase is just over $8 per month.  It just needs to be part of your overall mortgage planning process.

Let me know if you want to discuss how these changes might impact you.  I’m always happy to chat with you about your options!

Cheers…