As most of you will know, Canadians that borrow from a financial institution covered by the Bank Act with less than 20 per cent down payment must have mortgage default insurance. The premiums that they charge are calculated based on the loan-to-value ratio of the mortgage.
Before we get to insurance premiums, let’s first look at what the loan-to-value ratio means. As the name suggests, it is a calculation of the value of a home or property (value) vs. the amount of money borrowed (loan) to purchase that home. Here are two examples:
- Melanie and Ron have saved up $35,000 for a downpayment. They are interested in purchasing a home that is listed for $290,000. They will need to borrow $255,000 to purchase this home. Their downpayment represents 12% (35,000/290,000) of the purchase price, meaning that their loan-to-value ratio is 88%. Melanie and Ron would have to have mortgage default insurance as they have less than 20% down payment.
- Ben and Jonathan are interested in purchasing a home that needs some renovations. They are interested in purchasing a home that is listed for $180,000 (value). With their investments, and savings, they have a downpayment saved of $38,000. They would need to borrow $142,000 (loan) to purchase the home, and their downpayment is 26%, meaning their loan-to-value ratio is 74%. Ben and Jonathan would not have to have default insurance based on their loan-to-value ratio.
CMHC announced yesterday that premiums will be increasing for 1-4 unit owner-occupied properties, effective March 17, 2017. There will not be any changes to existing policies held by homeowners. Below is a chart outlining the increases to premiums, based on the loan-to-value ratio for that purchase.
According to CMHC, the average insured loan is approximately $245,000. The premium increase above would work out to about $5 more per monthly payment, ranging up to 12%, depending on the purchase price.
These insurance premiums are paid out over the life of any mortgage, so does not impact the amount of money that is needed upon closing. But what about if you already own a home?
If you are already a homeowner with an insured mortgage, there won’t be any changes to the current premiums that you pay. However, if you are looking at purchasing a new home, these new premiums would be applied to the amount that you increased your mortgage by, since your existing insurance policy moves with you. For example, Jessica and Orvel own a home and currently owe $198,000 on that mortgage. They are interested in purchasing a home that is listed for $350,000. Jessica and Orvel would pay the new premium on the amount that they increased their mortgage by, in this case, $152,000, leaving the initial $198,000 at the previous insurance premiums.
If you or anyone you know are thinking about looking at mortgage financing options – don’t wait! – we are here to help! Now could be a great time for you to take advantage of lower mortgage default insurance premiums while you can! And as always, The Valko Team are here to help you navigate these changes, and how then can affect you. Don’t hesitate to reach out to us with any questions about your mortgage financing needs!
Have questions? Give our office a call at 519-745-8019, send us an email or leave them in the comments below!