The Canada Mortgage and Housing Corporation (CMHC) just announced that it is increasing its mortgage loan insurance premiums, effective March 17, 2017. Don’t worry, it shouldn’t affect your ability to afford a home.
Mortgage loan insurance is necessary whenever less than 20% is put down on a home. The insurance protects the lender against mortgage default while allowing you to borrow with as little as 5% down.
The premium is calculated based on a loan-to-value ratio of the mortgage being insured. For the average insured mortgage, the increased premiums should only add about $5 to the monthly mortgage payments. In the first nine months of 2016, the average insured loan was for $245,000. The average down payment was approximately 8%.
“We do not expect the higher premiums to have a significant impact on the ability of Canadians to buy a home,” says Steven Mennill, Senior Vice-President, Insurance. “Overall, the changes will preserve competition in the mortgage loan insurance industry and contribute to financial stability.”
In order to qualify for CMHC insurance, your gross debt service (GDS) ratio must not exceed 32% of your total household income. During the first nine months of 2016, the average GDS was 25.6%. In case you’re wondering, you can calculate the GDS by adding your monthly principal, interest, property tax, and heat, then dividing that number by your total monthly income.
The premium can be paid in a lump sum, but borrowers usually decide to add it to the mortgage principal, so that it can be paid off monthly. If you are currently paying off an insured mortgage, the premium increase will not affect you, and current premiums will apply for all applications submitted before March 17, 2017.
For more information about mortgage insurance premiums and the increase, visit CMHC.