New home buyers taking out insured mortgages will have to dig a bit deeper into their pocketbooks as Canada Mortgage and Housing Corp. announced it will hike mortgage insurance premiums for the third time in the past four years.

The government-owned mortgage insurer said the increases would amount to an extra $5 a month for the typical insured mortgage, which CMHC said averaged $245,000 with an 8 per cent down payment in the first nine months of 2016. The changes apply only to new insured mortgages and would kick in as of March 17.

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The move is a response to stricter new capital requirements for mortgage insurers that the Office of the Superintendent of Financial Institutions introduced at the start of the year, part of a broader move by the financial regulator to make the mortgage industry more responsive to what OSFI sees as potential risks the housing market.

Federal regulations require lenders to take out mortgage insurance for any loan where the borrower has a down payment of less than 20 per cent. The insurance protects lenders in the even that a borrower defaults on the mortgage, but the premiums are typically passed onto borrowers and folded into monthly mortgage payments.

Unlike past premium increases, which have predominantly affected borrowers with small down payments, the changes that take effect in March are more significant for home buyers with bigger down payments.

Home buyers with a 5 per cent down payment will see their premiums increase by 40 basis points, while premiums will rise by 100 basis points for borrowers with down payments of 15 per cent. (A basis point is 1/100 of a percentage point.

For example, a home buyer with a five per cent down payment on a $150,000 mortgage pay an extra $2.82 a month on average, while monthly premiums will rise by nearly $40 for an average buyer with a 15 per cent down payment on an $850,000 mortgage.

Roughly two-thirds of home buyers taking out a CMHC-insured mortgage have down payments of less than 10 per cent, meaning for most new home buyers the changes will be “negligible,” said Steven Mennill, the Crown corporation’s senior vice-president of insurance.

“We are not doing this to affect housing markets or valuations,” Mr. Mennill said. “That’s not the objective. The objective is simply to preserve the returns on capital in the mortgage industry in a competitive environment.”

However, the premium increases come at a time when first-time buyers are facing mounting challenges to achieving homeownership thanks to rising mortgage rates and tougher federal regulations governing mortgage insurance.

Last fall, Ottawa unveiled a series of changes to mortgage insurance rules, including stricter income-testing criteria and new restrictions on portfolio insurance that lenders sometimes take out on mortgages with down payments above 20 per cent.

The latest increases to mortgage insurance premiums announced Tuesday will have a comparatively minor effect on the average home buyer, said James Laird, president of mortgage brokerage CanWise Financial. “Relative to the rule changes that were implemented in late 2016 this is not a major change,” he said.

The move will come as a relief to CMHC’s private-sector competitors, who had been pressing for premium increases to ease the pressure of OSFI’s higher capital requirements.

As the dominant government-owned mortgage insurer, CMHC is a price-setter in the mortgage insurance industry and typically makes the first move when it comes to raising and lowering insurance rates.

“We do have a responsibility to make sure that the premiums in the industry are such that the competitive environment is maintained, being the largest mortgage insurer and historically the centre of the pricing industry,” Mr. Mennill said.

The announced increases are slightly higher than what analysts had expected and should be positive move for private mortgage insurers Genworth MI Canada Inc. and Canada Guaranty, wrote Royal Bank of Canada analyst Geoffrey Kwan in a note to clients on Tuesday.

“We view mortgage insurance price increases as an effective tool to increase mortgage insurer profitability and capital positions yet is unlikely to materially impact the housing market,” he said.

The changes represent the latest move in an effort by regulators to protect the financial industry and consumers from rising household debt and soaring home prices in some markets.

After leaving mortgage insurance premiums virtually unchanged for more than a decade, CMHC has raised them three times in recent years. It hiked premiums by an average of 15 per cent in May 2014 and then raised rates an additional 15 per cent in June 2015 for borrowers who had down payments of 10 per cent.

CMHC also announced it was hiking premiums for “non-traditional” insured mortgages, such as those to home buyers with borrowed down payments, which it said it expects to grow in popularity as home buyers struggle to get a foothold in the housing market.

“There is some activity in that borrowed down payment area out in the marketplace, so this is a product that we expect to be used more going forward than it has been perhaps previously,” Mr. Mennill said.

Source:
TAMSIN MCMAHON – REAL ESTATE REPORTER
The Globe and Mail
Published Tuesday, Jan. 17, 2017 8:43AM EST
Last updated Tuesday, Jan. 17, 2017 11:45AM EST