Mortgage before May: Rising mortgage insurance premiums bump up costs

Mortgage before May: Rising mortgage insurance premiums bump up costs

If you’re in the market for a mortgage, and have less than 20 per cent down payment, then you might want to get that mortgage before May.

For the first time in more than a decade, Canada Mortgage and Housing Corporation (CMHC) is raising premiums for insuring mortgages on Canadian homes: an average 15 per cent.  A crown corporation, CMHC is Canada’s largest mortgage insurance provider. Private insurer Genworth has followed suit with a matching increase in premiums.

How does it hit your wallet? A home buyer with a $248,000 mortgage and a 5 per cent down payment will pay an extra $5 per month in insurance premiums. Your mortgage broker can calculate exactly how much the increase will mean to you.

Canadian homebuyers are required to have mortgage insurance if they have less than 20 per cent equity in their homes. The insurance provides protection for the lender in the case of a default. In general, the system works well: Canadians have a vested interest in maximizing their down payment, and in building some equity in their homes, and a prudent mortgage insurance system has contributed to a stable mortgage market in Canada.

The last change in premiums was a decade ago: when CMHC actually lowered the rate.  Experts say the increase in premiums is probably overdue – as insurers must hold adequate capital reserves.

Will this be the last increase for the next ten years? CMHC expressed plans to announce its premiums in the first quarter of every year going forward. So stay tuned in early 2015 for any more news.

In the meantime, there’s no cause for alarm for Canadian home buyers.  But there is a strong incentive for homebuyers to visit their mortgage broker right away. The change will come into effect on May 1st.  Homebuyers will be able to access the current lower rates if they have bought a home and are approved before the May 1 deadline, even if they have a later closing date.

If you’ve got less than a 20 per cent down payment, then you owe yourself a visit to your mortgage broker now.

Mortgage Market Commentary March 21, 2014

• TSX +27.79 to 14,361.83(CP) as positive U.S. economic data helped balance interest rate concerns
• Dow +108.88 to 16,331.05 after the Philadelphia Fed's manufacturing index rebounded to 9.0 in March from a negative 6.3 reading in February, well above expectations for a reading of 3.5. Also, the Conference Board’s leading indicator index of future economic performance increased 0.5 per cent in February, the largest amount in three months, following a slight 0.1 per cent rise in January.
• Dollar +.02c to 88.95cUS The currency had tumbled the day before following an indication from U.S. Federal Reserve chairwoman Janet Yellen that American interest rates could be headed higher earlier than thought.
• Oil -$.94 to $99.43 US
• Gold -$10.80 to $1,330.50US as hopes that the Ukraine crisis won't worsen weakened bullion prices for a fourth day

Canadian 5 year bond yields markets +.02 to 1.73. That’s a .12 bp increase in the past couple of days. The spread (obtained by subtracting the bond yield above from the NEW lower industry average 5 yr rate Published mortgage rate of 3.29) has moved well below the profit range at 1.56. If the increase in bond yield continues upward, the spread shrinks, which could prompt interest rates to rise. The range for investor desired profitability is currently a bit lower in the region of 1.75 and 1.95. The lower range at present is strictly due to competitive spring market pricing however doubtful lenders will tolerate this spread for long.

Don't bet your financial well-being on rising net worth

ROB CARRICK The Globe and Mail Mar. 17 2014
It was a good month for house price increases in February, and that means today’s most misleading measure of wealth has also improved. Gaining net worth is like losing weight. It’s great and all, but it’s a momentary victory, not permanent.

Net worth is the amount by which the value of the things you own exceeds the amount you owe. Statistics Canada’s latest tally shows that rising home prices and pension plan values pushed median family net worth to $243,800 in 2012, up 44.5 per cent on an inflation-adjusted basis from 2005.

You didn’t use to hear net worth mentioned much as it’s completely detached from the day-to-day life of spending and saving. But lately, net worth has gained some stature. In the debate over how financially healthy Canada’s middle class is, it’s become the gauge of choice for those who think we’re doing fine. This demands a reality check.

Here’s the real story of rising net worth: Runaway house prices have helped to gloss over a big surge in debt. Over all, there are some things to be pleased about in the latest net worth numbers. But we’re kidding ourselves if we think net worth has much to say about the financial well-being of the middle class.

To start with, there’s the housing problem. Real estate – that’s principal residences plus cottages, investment properties and other holdings – accounted for about 44.5 per cent of assets in 2012. That’s a lot of net worth to be based on an asset that has done abnormally well in recent years. National house prices grew by an average 5.6 per cent between 2005 and 2012; the inflation rate, which house prices can be expected to track over the long term, averaged just below 2 per cent over that period.

Home sales are losing momentum, but prices just keep on going in many cities. As reported Monday, the Canadian Real Estate Association’s Home Price Index showed a year-over-year 9.1-per-cent increase in Calgary last month and a 7.3-per-cent rise in Toronto. Vancouver, Saskatoon and Montreal were in the 2.5- to 3.5-per-cent range. Those increases mean more net worth is being added to the shaky foundation of the housing market.

There’s no consensus on what’s ahead for housing, but plenty of people say a looming price decline could undo at least some of the net worth gains in recent years. Housing could fall in price just as baby boomers try to actually make use of the net worth they have tied up in housing.

The housing-related holes in the rising net worth story don’t end there. The same soaring house prices that build net worth also lead to higher debt loads. Houses are so expensive today that people are relying on borrowing to maintain their lifestyles. Rising house prices even promote this. The more your house is worth, the more you can borrow against it using a home equity line of credit. Statistics Canada’s net worth data show that the outstanding balance on lines of credit rose a stunning 87 per cent from 2005 to 2012.
Other major contributors to higher net worth were company pension plans, registered retirement savings plans and registered retirement income funds, which collectively reached a family median of $116,700 in value, up from $77,400 in 2005. Rising stock markets between 2005 and 2012 increased saving by aging baby boomers, as did rising stock markets (even with the 2008-09 market crash).

Fatter pensions and RRSPs are far more beneficial than a rise in house prices because this money will help pay your living costs when you leave the work force. Selling a house mainly gives you money you’ll need to buy your next home.

And yet, like housing price increases, gains in registered savings are in no way money in the bank. After the big run-up of the past couple of years, a stock market correction would be natural and, potentially, sharp enough to roll back your net worth.

At best, net worth is useful financial trivia. But in emphasizing the rise in net worth over the past several years, we create an image of financial well-being based precariously on assets that have enjoyed a phenomenally good run in the past few years.


The better way to tell how people are doing financially is to focus on the debt side of the net worth ledger. Today, debt levels are a clear sign of middle-class distress.

Mortgage Market Commentary January 2, 2014

Happy New Year!

• TSX +40.16 to 13,621.55 (CP) as investors closed the books on a year that saw a solid advance, up 9.55 per cent for the year, with the advance racked up over the last five months. The market started to transition from one that was driven by central bank stimulus to an environment where investors started to focus more on economic fundamentals.
• Dow +72.37 to 16,576.66 also ended the year at a new high, as traders digested a mixed bag of data on home prices, consumer confidence and manufacturing. For the year, U.S. home prices reflected big gains in earlier months. They rose 13.6 per cent over the past 12 months, the fastest pace since February 2006 — before the U.S. real estate crash.
• Dollar +.02 to 94.022 US the end of a year in which the loonie fell below parity with the U.S. dollar, with little expectation it will regain that level any time soon. The currency started the year at 100.51 cents U.S. Part of the reason for the slide was increasing strength in the U.S. dollar on rising speculation starting in late May that the U.S. Federal Reserve would start to taper its US$85 billion of monthly bond purchases, a key stimulus measure that has kept long term rates low and supported a strong equity market rally. Most importantly, the view on the Bank of Canada changed, as we came into this year expecting the BoC to hike rates at some point
• Oil -$.59 to $98.70 US
• Gold +$5.20 to $1,209.00 US The gold sector fell about 48 per cent for the year while the precious metal has fallen about 28 per cent, the first annual loss since 2000.

Canadian 5 year bond yields markets +.03 to 1.95. The yield was 1.80 on Dec 18 and we have seen lenders start to increase fixed rates. The spread (obtained by subtracting the bond yield above from the industry average 5 yr rate published mortgage rate of 3.59) is well below the profit range at 1.64. If the increase in bond yield continues upward, the spread shrinks, which could prompt interest rates to rise. The range for investor desired profitability is currently a bit lower in the region of 1.80 and 2.00.



Five Canadian mortgage market predictions for 2014
Robert McLister Special to The Globe and Mail Dec. 30 2013


1. New mortgage rules
Expect more rule tightening in 2014 designed to reduce mortgage risk for lenders, mortgage default insurers and the government. By definition, those rules will make it slightly harder to get approved for some mortgages and further slow the housing market.
2. Credit unions will steal market share
Since they’re provincially regulated, credit unions have more flexible lending guidelines than federally regulated banks. They’ll use that to their advantage in addition to marketing more heavily, both online and to mortgage brokers. We’ll also see some big mergers this year as credit unions seek out economies of scale.
3. Stronger online players
A new breed of online mortgage broker is sacrificing commissions for volume, and selling cut-rate mortgages. This trend will heat up competition industrywide, delivering greater mortgage discounts to all consumers.
4. Hybrid mortgages will grow more popular
Economists and government officials have been warning us of higher rates for four years. So far they’ve been wrong, and now many consumers aren’t sure what to believe. More Canadians will hedge their rate bets with hybrid mortgages (part fixed and part variable).
5. Consumer IQs will increase

For those in the mortgage industry who prefer an uninformed consumer, your days are numbered. Canadians will spend more time researching rate comparison websites, online mortgage forums, news portals, blogs, calculators and other online mortgage tools. They’ll become increasingly savvy about fine print like penalty calculations, rate blend policies and refinance restrictions.