On June 1, 2015, mortgage default insurance (MDI) premiums went up for homebuyers who finance their purchase with less than a 10 per cent down payment. This will have little effect on housing affordability or access to mortgage financing. Why?
First off, the hike in MDI premiums is small and limited. It doesn’t apply to mortgages currently insured by CMHC (or applications before June 1st regardless of closing date). Moreover, it doesn’t affect homebuyers with down payments of 10 per cent or more.
What about buyers with less than a 10 per cent down payment? Their premiums went up by 0.45 per cent to 3.6 per cent. The average buyer putting down less than 10 per cent takes out a mortgage for $250,000, finances their purchase with a five-year mortgage rate, and amortizes the loan over 25 years. Let’s use these assumptions in a purchase financing scenario.
Let’s conservatively assume a discounted five-year mortgage interest rate of 2.79 per cent (buyers can currently do better than that) and a five per cent down payment. Under these assumptions, the recent increase in MDI premiums means this buyer is facing higher monthly mortgage payments in the amount of $5.
Some housing markets are more expensive than others, so let’s consider a scenario where the mortgage amounts to $450,000. Using the same financing assumptions as the previous scenario, the recent increase in MDI premiums translates into an increase in monthly mortgage payments of less than $10.
The difference in the amount of equity after five years in both of these scenarios is also negligible. In each case, assuming the market price remains static, buyers will have accumulated an equity stake of between 16 and 17 per cent, with the new higher premiums reducing equity over that time by less than 0.5 per cent.
Imagine if lending regulations were tightened so all home purchases financed with a five-year mortgage interest rate required buyers to qualify at the five- year benchmark rate instead of the contract rate (as at the time of writing, the benchmark rate is nearly 2 per cent higher than the conservatively discounted rate used in the scenarios as above). Or, imagine if the minimum down payment was raised. These regulatory changes would have a drastic effect on the housing market.
As for the effect of the limited and targeted increases in MDI premiums for buyers with less than a 10 per cent down payment? Few potential homebuyers will be sidelined by them. The scenarios above show they amount to one less cup of coffee per week from your favourite coffee shop.
Thankfully, not all moves to tighten mortgage regulations are created equal and the most recent increases are unlikely to derail the housing market. Of course, we remain vigilant and will continue to focus on preventing the kind of big-picture tightening in mortgage regulations that threaten to do so.
