New home buyers taking out insured mortgages will have to dig a bit deeper into their pocketbooks as Canada Mortgage and Housing Corp. announced it will hike mortgage insurance premiums for the third time in the past four years.
The government-owned mortgage insurer said the increases would amount to an extra $5 a month for the typical insured mortgage. The changes apply only to new insured mortgages and would kick in as of March 17.
The move is a response to stricter new capital requirements for mortgage insurers that the Office of the Superintendent of Financial Institutions introduced at the start of the year, part of a broader move to make the mortgage industry more responsive to what regulators see as potential risks to the housing market.
Federal rules require lenders to take out mortgage insurance for any loan in which the borrower has a down payment of less than 20 per cent. The insurance protects lenders in the event that a borrower defaults on the mortgage, but the premiums are typically passed onto borrowers and folded into monthly mortgage payments.
Unlike past premium increases, which have predominantly affected borrowers with small down payments, the changes that take effect in March are more significant for home buyers with bigger down payments.
Home buyers with a 5-per-cent down payment will see their premiums increase by 40 basis points, while premiums will rise by 100 basis points for borrowers with down payments of 15 per cent. (A basis point is 1/100 of a percentage point.)
For example, a home buyer with a 5-per-cent down payment on a $150,000 mortgage pay an extra $2.82 a month on average, while monthly premiums will rise by nearly $40 a month for a buyer with a 15-per-cent down payment on an $850,000 mortgage.
Roughly two-thirds of home buyers taking out a CMHC-insured mortgage have down payments of less than 10 per cent, meaning for most new home buyers the changes will be "negligible," said Steven Mennill, the Crown corporation's senior vice-president of insurance.
"We are not doing this to affect housing markets or valuations," Mr. Mennill said. "That's not the objective. The objective is simply to preserve the returns on capital in the mortgage industry in a competitive environment."
However, the premium increases come at a time when first-time buyers are facing mounting challenges to achieving home ownership thanks to mortgage rates that have jumped roughly 50 basis points since November, along with stricter income-testing criteria for insured mortgages and new restrictions on portfolio insurance that lenders sometimes take out on mortgages with down payments greater than 20 per cent.
"On top of the stress test requirements and mortgage rates starting to push up and home prices at all-time highs, I think that 2017 will be the most difficult year for first-time home buyers to enter the market in the last 10 years," said James Laird, president of mortgage brokerage CanWise Financial.
CMHC's move will likely come as a relief to the agency's private-sector competitors, who had been pressing for premium increases to ease the pressure of OSFI's higher capital requirements. As the dominant government-owned mortgage insurer, CMHC is a price-setter in the mortgage insurance industry and typically makes the first move when it comes to raising and lowering insurance rates.
"We do have a responsibility to make sure that the premiums in the industry are such that the competitive environment is maintained, being the largest mortgage insurer and historically the centre of the pricing industry," Mr. Mennill said.
The announced increases are slightly higher than what analysts had expected and should be a positive move for private mortgage insurers Genworth MI Canada Inc. and Canada Guaranty, Geoffrey Kwan, a Royal Bank of Canada analyst, wrote in a note to clients on Tuesday.
"We view mortgage insurance price increases as an effective tool to increase mortgage insurer profitability and capital positions yet is unlikely to materially impact the housing market," he said.
Neither private-sector insurer announced premium changes on Tuesday, but both are expected to follow CMHC. "The price adjustments are reasonable given increased regulatory capital requirements and will support a healthy industry," Andrew Charles, chief executive of Canada Guaranty, said in an e-mail.
The premium changes represent the latest move in an effort by regulators to protect the financial industry and consumers from rising household debt and soaring house prices in some markets.
After leaving mortgage insurance premiums virtually unchanged for more than a decade, CMHC has raised them three times in recent years. It hiked premiums by an average of 15 per cent in May, 2014, and then raised rates an additional 15 per cent in June, 2015, for borrowers who had down payments of 10 per cent.
CMHC also announced that it was hiking premiums for "non-traditional" insured mortgages, such as those to home buyers with borrowed down payments, which it said it expects to grow in popularity as Canadians struggle to get a foothold in the housing market.
"There is some activity in that borrowed down payment area out in the marketplace, so this is a product that we expect to be used more going forward than it has been perhaps previously," Mr. Mennill said.