Recently, there was a hike on the insurance premium for mortgage loans as reported by the federal housing agency of Canada. This is due to the recent regulatory requirements that require the agency to get increased capital in order to negate possible risks in the volatile market of real-estate.
New purchasers should not feel a major impact because of the increases as anticipated by the Canada Mortgage and Housing Corp. For example, a $245,000 loan, which is the average insured loan as per CMHC, will have an added $5 to the mortgage payment paid on a monthly basis. The overall goal of the increase, as stated by the agency, is preserving competition in the industry of mortgage insurance while contributing to financial stability.
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There have been recent changes in mortgage policies in Canada which were part of the effort in cooling down the country’s red-hot housing market. Examples of those changes were increasing the down payment and the interest rates, as well as shortening the amortization periods. Compared to these impacting changes, the increase in the insurance premiums is minimal. But still, if all of these changes are combined, the impact will still be felt by the homebuyers. This is especially significant to those first time property buyers.
The increase in the insurance premium is the latest in a long list of policies released by the housing authority, which makes entering Canada’s housing market increasingly difficult. The government’s actions, which started in 2016, and now this increase clearly show concern on the housing industry which has been overheating. All the regulations are meant to make purchasing property more difficult, which in turn decreases the demand. This will also slow down appreciation of properties.
The changes in the premium are computed based on the loan-to-value ratio of the insured mortgage. This ratio will be the basis for the size of the increase, as stated by CMHC. The last time they made changes to the insurance premiums was June 2015 when it released a policy wherein a hike was imposed on mortgage loans where the down payment was 10 per cent or lower. The current increase is perceived by experts as a move to spread the change across all loan types more evenly. An insurance on mortgage loan is usually required if the down payment given by the homebuyer is below 20 per cent. The insurance premium can be settled in a one-time full payment but often included in the principal of the mortgage to be paid through the course of the loan.
In 2016, measures were initiated by the federal government to curb risk in Canada’s real estate industry. Before the insurance premium increase, Finance Minister Bill Morneau required the agency to do a stress test to determine if borrowers can still meet the mortgage payments if there is increase in interest rates or change in their financial status.
According to a study by CMHC, home sales as well as new housing projects will begin to decline, and will stabilize again by 2018. Homebuyers that are confused by the new policy should contact a mortgage broker.