CMHC to Increase Mortgage Insurance Premiums on March 17
The Canada Mortgage and Housing Corporation (CMHC) has announced an increase in its homeowner mortgage loan insurance premiums, set to take effect on March 17, 2017. Mortgage loan insurance plays a pivotal role in the Canadian housing market, ensuring that homebuyers, especially those with a smaller down payment, can secure their dream homes with confidence. Here’s an in-depth look into this recent announcement and its implications.
Understanding Mortgage Loan Insurance
Firstly, it’s essential to understand what mortgage loan insurance is and why it’s crucial. Mortgage loan insurance protects the lender in the unlikely event the borrower defaults on their mortgage. While this insurance primarily benefits the lender, it also plays a critical role for potential homebuyers. Without this insurance, lenders would be more hesitant to approve loans for those with smaller down payments, limiting the pool of eligible homebuyers.
How Are Premiums Calculated?
The announcement emphasizes that the premiums are calculated based on the loan-to-value (LTV) ratio of the mortgage being insured. The LTV ratio is a metric used by lenders to measure the risk associated with a loan. It’s determined by dividing the mortgage amount by the appraised value of the property. For instance, if you borrow $90,000 to purchase a $100,000 home, the LTV ratio would be 90%.
Lenders use this ratio to decide on the premium amount, with a higher LTV ratio typically resulting in a higher premium due to the perceived increased risk.
The Importance of Down Payments
Lenders generally require mortgage loan insurance when a homebuyer makes a down payment of less than 20% of the home’s purchase price. This threshold is set because a higher down payment generally indicates a lower risk for the lender.
For instance, someone who can afford a 20% down payment is generally seen as more financially stable than someone who can only afford a 5% down payment. The lesser the down payment, the higher the LTV ratio, leading to a larger insurance premium.
The New Premium Rates
While the exact details of the rate increase have not been specified here, potential homebuyers should be aware that any increase in insurance premiums can affect their monthly mortgage payments, especially if they choose to spread out the premium costs with monthly payments. It’s essential to consult with your mortgage professional to understand the specific changes and how they might impact your mortgage affordability.
Implications for Homebuyers
The hike in premiums might discourage some potential homebuyers, especially first-timers, from entering the market. It can increase the overall cost of homeownership. However, it’s essential to note that these measures often are introduced to ensure the stability of the housing market and the broader economy.
Potential homebuyers should also remember that while insurance premiums are a cost to consider, they should not be the sole factor in determining whether to purchase a home. Other considerations, such as interest rates, property taxes, and home maintenance costs, play significant roles in the overall affordability of homeownership.
The announcement from CMHC regarding the increase in homeowner mortgage loan insurance premiums is significant for those planning to buy a home with less than a 20% down payment. While it may make homeownership slightly more expensive for some, it’s a step taken in the interest of maintaining a stable and healthy housing market in Canada.
Contact Us for More Information
Understanding the ins and outs of mortgage insurance can be challenging, but you don’t have to navigate it alone. If you have further questions or need assistance in determining how this change might impact your homeownership plans, don’t hesitate to reach out. Our team of experts is here to provide clarity and guidance. Contact us today for more information!
Contact us for more information!