Starting June 1, Canadians buying a home with less than 10 per cent down will pay higher mortgage insurance premiums to CMHC and Genworth, two of Canada’s three mortgage insurance providers. Earlier this month, CMHC announced a 15 per cent rate hike (3.15 to 3.6 per cent for those borrowing up and including 95 of the home’s value), and Genworth quickly announced it would match CMHC’s rate hike, although Genworth says its announcement was unrelated to CMHC’s rate hike. So far, Canada Guaranty has not announced any changes to its premiums.
Mortgage insurance is designed to protect the lender in case the homeowner defaults on the mortgage. Homeowners’ insurance, on the other hand, protects the buyer’s investment in case of fire, vandalism or other problems.
What do these rate hikes actually mean for buyers?
These changes will not apply to homeowners who already have insurance through CMHC or Genworth or those with a down payment of 10 per cent or more (generally, only buyers with less than 20 per cent down, which is considered a high-ratio mortgage, are required to have an insured mortgage). CMHC does not insure homes with a purchase price of $1 million or more, so this rate hike would not impact those buyers either.
While 15 per cent may sound like a significant rate hike, experts predict that for most borrowers, the increase will only add a few dollars to each mortgage payment. Genworth notes that a homebuyer putting down 5 per cent (the minimum down payment required) and borrowing $300,000 at 2.79 per cent over a 25-year amortization period would pay an extra $6 per month.
However, many first-time homebuyers in hot markets like Vancouver and Toronto are already stretched to afford a down payment and monthly mortgage payments, so some predict that this move could delay first-time buyers by incentivizing them to save up a larger down payment. And when first-time buyers delay entering the market, it can have a cascading effect on the entire housing market by delaying move-up buyers who want to sell their starter homes.
First-time buyers trying to come up with a down payment do have several other options to consider. Many first-time borrowers use gifts or loans from family members or use the RRSP Home Buyer’s Plan, which allows them to borrow money as a first-time buyer (in certain cases, other buyers may qualify as well).