Higher Capital Targets For CMHC

by Darrin DeRoches March 20 - 26, 2014

Mortgage rates have stayed low for the past three years, and they will stay low into the near future, so things seem bright for buyers. The lower the rate, the higher you will be approved for and the bigger the property you can buy. Sounds good but the Canadian Mortgage and Housing Corporation has decided to raise their fees to insure your home. Most people buying a property are not even aware of this insurance and do not even consider it when buying a home. So how does it work?     Quite simply, every home must be insured by CMHC if you put down less than 20 per cent on a property. This relates to the majority of home buyers. There are a couple of other insurance companies but CMHC are the standard. If they do not approve of the deal, you do not get a mortgage. It is that simple. They can kill a deal for many reasons and if they deem the deal to be “shaky” – no insurance and no home. So what is the big deal about the increase?     As of May 1st 2014, the premium will go up from 2.75 per cent to 3.15 per cent on the average 5 per cent down deal. Their website then goes on to say it will only cost $5 more per month on the average mortgage – so who really cares? All of this is really misleading. The average homebuyer is only putting down 5 per cent when buying, and since the average home will hit $400,000 this year, what is this slight increase going to cost you? Around $1,600 on the deal which really increases the monthly mortgage about $8 per month. Currently you would pay about $11,000 of insurance on this deal and your premium will now be around $13,600 for insurance on an average sale of $400,000 property. Does this not seem to be a lot of money for insurance you will never use and the CMHC never really pays out?     We went through a housing crisis a couple of years ago so you would think that the insurance company must have paid out millions of dollars on this disaster. If there is a huge flood or catastrophe, insurance companies have to pay out millions if not billions. The CMHC explains the increase this way: “The higher premiums reflect CMHC’s higher capital targets” said Steven Mennill, CMHC’s Vice–President, Insurance Operations. This statement should be written in simpler language like this “We want more money, so we are raising our rates”. But don’t worry, we will just roll these costs into your mortgage so it is only like five bucks more a month. The reality of it is that this extra $1,600, which is about $13,000 on the average mortgage, is going to cost you about $20,000 over the course of your mortgage. But just look at it as an extra five bucks per month to the CHMC since they want “higher capital targets”. Your only option is to put down 20 per cent — so come up with another $60,000 on an average deal to save the insurance premium of $20,000 over 25 years. V     Darrin DeRoches is a local real estate and mortgage broker. He can be reached to answer questions, comments or stories about real estate experiences through this weekly column at sold@uniquerealty.ca.