Blog Post

Recent Insurance Premium Increase Breakdown

Katherine Martin • Apr 24, 2015

Insurance Premium Increase

On April 2nd 2015 CMHC announced that effective June 1, 2015, the mortgage loan insurance premiums for homebuyers with less than a 10% down payment will increase by approximately 15%.

Canadian financial expert Preet Banerjee recorded a short 2 minute video that summarizes how the increase could impact you. Watch the video and follow along with the transcript if you like. From there, let’s discuss how breaking down the increase to a simple monthly payment doesn’t account for the true cost of the increase.

Transcript

How might the recently announced increase to CMHC premiums affect you? If you’re buying a home with less than 10% down, you might be paying more for your mortgage loan insurance as of June 1st 2015. CMHC insurance is mortgage default insurance that many homebuyers require in order to get a mortgage from lenders.

The premium for this insurance usually gets added to your mortgage balance. For down payments between 5% and 9.99% the premium up until June 1st 2015 is 3.15%, but on June 1st 2015 the premium increases to 3.60%.

To see how this change might affect your bottom line let’s look at an example:

Suppose you want to buy a $400k home, a 5% down payment would be $20k. That means you would initially be looking at a $380k mortgage. The old premium 3.15% equals $11,97o which would increase your initial mortgage balance to $391,970. The new premium of 3.6% equals $13,680, which would increase your initial mortgage balance to $393,680. That’s a difference of $1710. Assuming a 2.5% 5 yr fixed rate mortgage with an amortization of 25 years, that means that under the old premium your mortgage payments would initially be $1,755.89. With the increased premium your mortgage payments would initially be $1763.55.

That works out to an increase of $7.66 per month.

So is CMHC selling me a used car?

When CMHC initially made the announcement, they included the following in their release: “For the average Canadian homebuyer who has less than a 10% down payment, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment. This is not expected to have a material impact on housing markets.”

It kinda sounds like CMHC is framing this increase as one that won’t have an impact to the average Canadian home buyer. Isn’t this a lot like a low-brow used car sales tactic of trying to sell a car without acknowledging the price or interest rate but rather simply focusing on the affordability of the monthly payments?

Let’s use Preet’s example. Although $7.66 a month increase in a mortgage payment doesn’t sound like a huge deal… there are some flaws in the assumptions. To break down the increase into a monthly cost in order to minimize it’s impact makes the assumption that you are going to take the full payment schedule to payoff your mortgage. That is 25 years. What is the likely hood that you are now purchasing the home you are going to be living in for the next 25 years? As most Canadians either move or change their mortgage financing every 3 years… not likely.

If you go back to the transcript or watch the video, you will see that:

The actual increase in premium isn’t just $7.66 a month, it’s the total of $1710.

This is because the $1710 is capitalized into your mortgage, or added to your mortgage balance… so when you pay out your mortgage you will be paying the FULL amount at that time. There is no escaping it. Regardless of how you break it down, if you refinance your mortgage or if you sell your property and buy a new place, you will eventually pay the full $1710. So to present the increase as insignificant seems rather insincere.

Keep in mind that in this example the actual overall cost of insurance is actually $13,680 not just the increase of $1710.

Takeaway

Although it’s true, the immediate impact of the increase might only be a few dollars added to your monthly payment, if you are purchasing a property with 5% down, you should be aware of the greater impact the entire insurance premium can have on you down the road.

After you apply your downpayment of 5%, and add back the insurance premium of 3.6%, you actually only have 1.4% equity left in your property. If you are looking to sell your place in the short term, with typical real estate commissions at 5%, you would already be 3.6% underwater from day 1 which could significantly limit your options.

When buying a property with 5% down, it is imperative that you have a plan in place and that you understand how the decisions you make today can impact your future. I would love to help you work on a plan.

Feel free to contact me anytime.

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Mail

Katherine Martin

Origin Mortgages

Phone: 1-604-454-0843
Email: kmartin@planmymortgage.ca
Fax: 1-604-454-0842

Why Downpayment Source Matters

By Katherine Martin • 01 May, 2024

If you’re looking to purchase a property, although you might not think it matters too much, the source of your downpayment means a great deal to the lender. Let’s discuss the lender requirements, what your downpayment tells the lender about your financial situation, a how downpayment helps establish the mortgage loan to value. Anti-money laundering Lenders care about your downpayment source because, legally, they have to. To prevent money laundering, lenders have to document the source of the downpayment on every home purchase. Acceptable forms of downpayment are money from your resources, borrowed funds through an insured program called the FlexDown, or money you receive as a gift from an immediate family member. To prove the funds are from your resources and not laundered money from the proceeds of crime, you’ll be required to provide bank statements showing the money has been in your account for at least 90 days or that you’ve accumulated the funds through payroll deposits or other acceptable means. Now, if you’re borrowing all or part of your downpayment, you’ll need to include the costs of carrying the payments on the borrowed downpayment in your debt service ratios. If you’re the recipient of a gift from a direct family member, you’ll need to provide a signed gift letter indicating that the funds are a true gift and have no schedule for repayment. From there, you’ll need to show the money deposit into your account. Financial suitability Lenders care about the source of the downpayment because it is an indicator that you are financially able to purchase the property. Showing the lender that your downpayment is coming from your resources is the best. This demonstrates that you have positive cash flow and that you’re able to save money and manage your finances in a way that indicates you’ll most likely make your mortgage payments on time. If your downpayment is borrowed or from a gift, there’s a chance that they’ll want to scrutinize the rest of your application more closely. The bigger your downpayment, the better, well, as far as the lender is concerned. The way they see it, there is a direct correlation between how much money you have as equity to the likelihood you will or won’t default on their mortgage. Essentially, the more equity you have, the less likely you will walk away from the mortgage, which lessens their risk. Downpayment establishes the loan to value (LTV) Thirdly, your downpayment establishes the loan to value ratio. The loan to value ratio or LTV is the percentage of the property’s value compared to the mortgage amount. In Canada, a lender cannot lend more than 95% of a property’s value. So, if you’re buying a home for $400k, the lender can lend $380k, and you’re responsible for coming up with 5%, $ 20k in this situation. But you might be asking yourself, how does the source of the downpayment impact LTV? Great question, and to answer this, we have to look at how to establish property value. Simply put, something is worth what someone is willing to pay for it and what someone is willing to sell it for. Of course, within reason, having no external factors coming into play. When dealing with real estate, an appraisal of the property will include comparisons of what other people have agreed to pay for similar properties in the past. You’ll often hear of situations where buyers and sellers try to inflate the sale price to help finalize the transaction artificially. Any scenario where the buyer isn’t coming up with all of the money for the downpayment, independent of the seller, impacts the LTV. All details of a real estate transaction purchase and sale have to be disclosed to the lender. If there’s any money transferring behind the scenes, this impacts the LTV, and the lender won’t proceed with financing. Non-disclosure to the lender is mortgage fraud. So there you have it; hopefully, this provides context to why lenders ask for documents to prove the source of your downpayment. If you’d like to talk about mortgage financing, please connect anytime; it would be a pleasure to work with you.

Porting Your Mortgage

By Katherine Martin • 24 Apr, 2024

Porting your mortgage is when you transfer the remainder of your current mortgage term, outstanding principal balance, and interest rate to a new property if you’re selling your existing home and buying a new one. Now, despite what some big banks would lead you to believe, porting your mortgage is not an easy process. It’s not a magic process that guarantees you will qualify to purchase a new property using the mortgage you had on a previous property. In addition to re-qualifying for the mortgage you already have, the lender will also assess the property you’re looking to purchase. Many moving parts come into play. You’re more likely to have significant setbacks throughout the process than you are to execute a flawless port. Here are some of the reasons: You may not qualify for the mortgage Let’s say you’re moving to a new city to take a new job. If you’re relying on porting your mortgage to buy a new property, you’ll have to substantiate your new income. If you’re on probation or changed professions, there’s a chance the lender will decline your application. Porting a mortgage is a lot like qualifying for a new mortgage, just with more conditions. The property you are buying has to be approved So let’s say that your income isn’t an issue and that you qualify for the mortgage. The subject property you want to purchase has to be approved as well. Just because the lender accepted your last property as collateral for the mortgage doesn’t mean the lender will accept the new property. The lender will require an appraisal and scrutinize the condition of the property you’re looking to buy. Property values are rarely the same Chances are, if you’re selling a property and buying a new one, there’ll be some price difference. When looking to port a mortgage, if the new property’s value is higher than your previous property, requiring a higher mortgage amount, you’ll most likely have to take a blended rate on the new money, which could increase your payment. If the property value is considerably less, you might incur a penalty to reduce the total mortgage amount. You still need a downpayment Porting a mortgage isn’t just a simple case of swapping one property for another while keeping the same mortgage. You’re still required to come up with a downpayment on the new property. You’ll most likely have to pay a penalty Most lenders will charge the total discharge penalty when you sell your property and take it from the sale proceeds. The penalty is then refunded when you execute the port and purchase the new property. So if you are relying on the proceeds of sale to come up with your downpayment, you might have to make other arrangements. Timelines rarely work out When assessing the housing market, It’s usually a buyer’s market or a seller’s market, not both at the same time. So although you may be able to sell your property overnight, you might not be able to find a suitable property to buy. Alternatively, you may be able to find many suitable properties to purchase while your house sits on the market with no showings. And, chances are, when you end up selling your property and find a new property to buy, the closing dates rarely match up perfectly. Different lenders have different port periods Understanding that different lenders have different port periods is where the fine print in the mortgage documents comes into play. Did you know that depending on the lender, the time you have to port your mortgage can range from one day to six months? So if it’s one day, your lawyer will have to close both the sale of your property and the purchase of your new property on the same day, or the port won’t work. Or, with a more extended port period, you run the risk of selling your house with the intention of porting the mortgage, only to not be able to find a suitable property to buy. So while the idea of porting your mortgage can seem like a good idea, and it might even make sense if you have a low rate that you want to carry over to a property of similar value, it’s always a good idea to get professional mortgage advice and look at all your options. While porting your mortgage is a nice feature to have because it provides you with options, please understand that it is not a guarantee that you’ll be able to swap out properties and keep making the same payments. There’s a lot to know. If you’re looking to sell your existing property and buy a new one, please connect anytime. It would be a pleasure to walk you through the process and help you consider all your options, including a port if that makes the most sense!