Important Changes to Mortgage Qualification Coming October 17th, 2016
As discussed earlier in April, mortgage loan insurance premiums were increased last week, resulting in an approximate increase of 15% to insurance premiums for those purchasing a home with less than 10% down payment.
While the impending increase did cause a bit of a increase in activity for the months of April and May, as prospective home buyers sped up their home search process to avoid the increase in premiums. However, now that the premium increase is complete, what is its effect on those looking to purchase going forward? What impact does 15% increase to mortgage loan insurance premiums have on mortgage qualification?
The simple answer is: not a lot. The increased premiums are, on average, resulting in a relatively small increase to monthly payments, and in turn having a negligible impact on mortgage qualification. For example, for a potential home owner with a household income of $100,000, carrying $10,000 in credit card debt, and $500 monthly auto loan payments, prior to June 1st this individual qualified for purchasing a $495,000 home with a 5% down payment but as on June 1st, 2015 this same person qualifies for the purchase of a $492,000 home with a 5% down payment. While qualification has remained relatively unaffected, the increased premiums will make a noticeable difference to homeowner’s bottom lines over time.
Prior to June 1st, someone purchasing a $500,000 home with a $25,000(5%) down payment would have been looking at monthly mortgage payments of $1,867.77* when including a $14,962 mortgage loan insurance premium. After June 1st, the same person purchasing a $500,000 home with a 5% down payment is looking at a monthly mortgage payment of $1,875.92* when including the new $17,100 mortgage loan insurance premium. The $2,138 increase to premium rates has resulted in an increased monthly mortgage payment of $8.15. Over the course of 25 years, that difference in monthly payments adds up to $2,445. Therefore, the increase to mortgage loan insurance premiums carries a total cost for homeowners of $4,583.
While the increased premiums do carry a cost, fortunately the change does not affect mortgage qualification dramatically, meaning for those who were pre-approved prior to June 1st, they can continue searching in the same house price range.
Mortgage Loan insurance is a type of insurance provided by 3 main providers in Canada: CMHC, Genworth, and Canada Guarantee. This type of insurance provides coverage to mortgage lenders in the event of a foreclosure. Mortgage Loan insurance does not provide insurance coverage to the home owner, however, its cost is their responsibility. The benefit of mortgage loan insurance is that it allows for Canadians to purchase a home with less than 20% down.
*based on a mortgage rate of 2.69%, and a 25 year amortization
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