CMHC Raises Mortgage Premiums

mortgage-insurance-premiumsPeople without a 20% down payment will be paying more to buy a house. Come May 1, the nation’s largest default insurer is bumping up its standard premiums by 0.10 to 0.40 percentage points. It's the first hike to homeowner insurance premiums since 1998.

Stated income applications will be charged even more. (See the new premium tables here.)

For the average borrower with 5% down, that makes home buying $992 more expensive (plus interest if the premium is rolled into the mortgage, which it usually is).

The average CMHC insured mortgage at 95% loan-to-value was $248,000 in 2013. CMHC says this will raise that homeowner’s monthly payments by about $5. Not too agonizing.

The impact of this news is negligible unless you’re putting down less than 15%. At 85% LTV, for example, the extra premium is only $125 on a $250,000 25-year mortgage at 3.49%.

Canadian-Mortgage-Default-InsurersThe two other private insurers haven’t announced whether they’ll match CMHC’s increase but it’s a likely bet they will. Rising targets for capital and return on equity and a potentially riskier housing market have warranted higher premiums for a while.

“Recognizing the last price increase was in the 1990’s and in light of increasing capital requirements over the same period of time, we view this as a prudent step being taken,” says Canada Guaranty CEO Andrew Charles.

CMHC does not anticipate a significant change in volumes leading up to the effective date (May 1), said Steven Mennill, Vice-President, Insurance Operations at CMHC. But if our past experience is a guide, consumers may front-run these changes based on the perceived cost increase.

Long term, CMHC is spot-on in saying “The premium increase is not expected to have a material impact on the housing market.” You’d have to be on the very edge of affording a home for this to affect you. As such, the company expects no impact on its homeowner insurance volumes. (In 2013 CMHC insured 192,000 residential homeowner units.)

Mennill also clarified that, “This is not a Department of Finance initiative. This is a CMHC business decision based on our annual review of premiums.”

On a side note, CMHC’s move could boost the volumes and earnings of lenders serving the uninsured market, like Equitable Bank and Home Trust. Their lender fees, which are basically self-insurance premiums, suddenly become more competitive vis-à-vis insured financing. This assumes that non-prime lenders don’t take this opportunity to lift their own fees.

More quick points:

  • Existing insured borrowers are unaffected by this news (unless they increase their insured mortgage later).
  • CMHC’s fee hikes apply to owner-occupied, self-employed and 1-to-4 unit rental property applications.
  • Self-employed borrowers without traditional income validation (i.e., stated income borrowers) will see an even bigger fee increase. On stated income applications of 85.01% to 90% LTV, homeowners will pay 70 basis points more than today. That’s $1,750 more on a $250,000 mortgage, plus interest if the premium is rolled into the mortgage.
  • Those submitting applications to CMHC before May 1 get the existing lower premium.
  • Note that “complete borrower and property details must be submitted to CMHC” before May 1 to qualify for the old premiums, including the property address.
  • CMHC says the borrower’s closing date will have no effect on the premiums charged to the client.
  • Going forward, CMHC will start announcing any changes to its premiums in the first quarter of each year.

Past CMHC insurance premium changes:

  • In 2006 CMHC added the homeowner premium surcharge for extended amortizations beyond 25 years.
  • In 2006 CMHC eliminated the application fee for all high-ratio homeowner applications.
  • In 2005 CMHC reduced its homeowner premiums in the 90.01% to 95% loan-to-value range by 15% and its multi-unit affordable housing premiums by 15%.
  • In 2003 CMHC reduced its homeowner premiums by 15% on all loan-to-value ranges.
  • In 2002 CMHC increased its mortgage loan insurance premiums for new multi-unit residential properties (5 units or more).

(Source: CMHC)

CMHC also increased its portfolio insurance premiums by 10 basis points on Jan. 1, 2014. That applies to mortgages with 20%+ equity.

“We increased the portfolio insurance base price to reflect increased costs and to reflect current market prices,” says spokesperson Charles Sauriol. “…Each application for portfolio insurance is evaluated on an individual basis and applies risk-based pricing by assessing the characteristics of the loans within the portfolio pool.”

Rob McLister, CMT (email)

  1. One questions;
    Are the premiums being charged by the non-Crown Corporation companies i.e. Genworth, OFSI mandated?
    Will Genworth now be told to raise their premiums to this level or are they allowed to have a market advantage?

  2. For a $500,000 house with 10% down, CMHC premium is $9000. 15% more translates to an extra $1350 dollars. I think everyone can afford another $1350 dollars for closing cost. Conclusion: this new policy will have next to none impacts on housing market.

  3. osfi does not have a mandate over pricing. the players in the market are free to do as they please. as the article states, with increasing targets for capital levels the only thing that could be done is to increase prices – which have not been increased in a very long time.

  4. By ever-so-gradually dampening the real estate market, I have to admit that the ‘housing file’ has been perfected by Canada.
    Many small tweaks is the mantra.
    Mark Carney (‘the architect’) was right. There are many tools in the tool box.

  5. thank you rob for an excellent breakdown, as always.
    given the magnitude of the premium increase alongside of historical cmhc pricing practices one could fairly safely assume that this was more OSFI’s doing than CMHC’s. that or new management is simply better at pricing risk.
    any thoughts on which it might be?
    thanks again.

  6. OSFI wouldn’t directly mandate pricing increases but when the amount of regulatory capital insurers have to hold increases, the return on equity goes down. Part of the premium covers the risk and another provides the return for the investor willing to tie up all that money.

  7. Quick question, we qualified for a new build in January, the mortgage is a draw mortgage with the first draw scheduled to come out prior to May 1, and completion date in November. We have qualified with 10% down, what will CMHC end up charging us?
    Thanks in advance!

  8. So long as the CMHC has approved your application prior to May 1st, you should be okay. Check with your lender/broker to confirm it has been approved.

  9. agreed william, it is an indirect pricing increase via OSFI or higher internal management capital targets. i assume this must be an osfi driven decision given the lack of any meaningful discussion in the news release on why the management targets have increased.
    perhaps more interesting tho is how high the level of genworth premiums would be in the absence of the cmhc.
    my personal view is that given cmhc’s record of premium reductions in the build up to the current real estate overvaluations (when risk is rising) i have zero faith in the cmhc to price risk accurately.
    it is a shame that private insurers must follow cmhc’s lead or lose market share. a clear case of the blind leading the blind.

  10. Hi Nick,
    CMHC’s sample rate matches the 5-year fixed “special offers” currently being advertised by major banks (3.49%). Whether it’s 30+ basis points above today’s best deals is inconsequential for example purposes. Moreover, I suspect they wanted to use a sample rate that would remain relevant if rates rose.

  11. Thanks, I made a key error, I should have said “approved” rather than “qualified” in my original post.

  12. It’s not a shame for private insurers it’s an opportunity for them. They’ve wanted to raise premiums for quite some time.

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