New CMHC Premiums: 2 Steps Forward, 1 Step Back?
CMHC raised their insurance premium rates on January 17th, 2017. These new CMHC premiums are seen as a direct consequence of the regulatory changes that OSFI (Office of the Superintendent of Financial Institutions) implemented in October 2016. Those changes already had immediate impact to non-bank lenders in the industry: from tougher lender requirements, higher rates for certain Canadians and for some lenders, or they just stopped lending resulting in fewer choices for Canadians.
The new capital requirements set out by OSFI were seen as a move to slow down hot markets within the county, mostly targeting Vancouver and Toronto. In simple terms the changes made lenders hold more capital to support the loans they give Canadians. If you are holding onto more money as a company, you can’t make money off it, so the ‘cost’ of doing business gets more expensive. One result to remedy this for the company is to raise rates.
Let’s focus on the Vancouver market. In the last few months, the BC government has done a few things to improve affordability in the real estate market, particularly for first time buyers or the average home owner. This included raising the BC Homeowner Grant to $1.6MM from $1.2MM and the recently launched BC HOME Loan Program. Although some opinions differ on the effectiveness of these programs, most would generally agree that its two steps forward.
Back to the new CMHC premiums. As most agree that those were two steps forward, the same majority would agree that this is one step back for the affordability of home ownership. In their press release, CMHC advises that it should only increase the monthly payments by $5 a month. However, that’s based on an average mortgage of $245,000. In Vancouver, not many first time buyers or people look to move up the property ladder have a mortgage of $245,000.
Let’s use the example to couple together the two steps forward and one step back. Let’s say a first-time buyer is buying their first condo for $700,000 and will be using the BC Government’s HOME program. They’ve saved their 2.5% which the government will match, so they have a 5% “non-traditional down payment” who’s premium has jumped from 3.85% to 4.5%. You may be wondering what “non-traditional” means, well if you use the BC HOME program and your total down payment with the government’s money is only 5%, you pay an even higher insurance premium!
Purchase Price: $700,000
5% Down-Payment: $35,000 (remember BC HOME program loaned $17,500 of that)
Mortgage Required: $665,000
New CMHC Premium: $29,925
Total Mortgage: $694,925
Your total mortgage of $694,925 is pretty close to the purchase price! And these numbers don’t include your property transfer tax of $12,000 which will have to be paid for outside of the mortgage.
Oh, and don’t forget, you still owe the BC HOME loan repayment starting in five years’ time. Let’s factor that in: Your equity (purchase price less mortgage) is $5,075 on day one of your purchase (despite your $35,000 down payment) …. But in five years you’ll owe $17,500 to the BC HOME program. If we include that in the equity calculation, well bad news for your equity …. It’s now a negative $12,425.
This is one view of the changes. Everyone’s goals and finances are different and the changes impact everyone differently. Working with a Mortgage Consultant takes the stress out of the process as they keep up to date with the changes and can access the majority of lending options in Canada. Let us make sure your two steps forward are bigger than any one step back.