Real estate agent Ria Bell, left, talks with Richard Lupton and his wife Linda about the recent updates to the kitchen during an open house in Grandview Heights, Ohio, Sunday, June 24, 2007. Sales of previously owned homes in the U.S. fell in May to the lowest level in almost four years, reinforcing concerns about a protracted housing slump. Photographer: Jay LaPrete/Bloomberg News. Jay LaPrete/Bloomberg News
Canada's national housing agency has increased the cost of insuring mortgages for homebuyers who make down payments of less than 20 per cent.
Starting in May, the housing agency will charge an average of about 15 per cent more to insure mortgages, CMHC said in a release Friday.
Prior to the announcement, the premiums ranged between 0.5 per cent and 2.75 per cent. Under the new rules, they will range from 0.6 per cent to 3.15 per cent.
The changes are unlikely to have a major effect on the housing market, but in real-dollar terms, the move makes it incrementally more expensive to buy a home. A heavily leveraged buyer — someone with only five per cent down, and therefore borrowing 95 per cent of the home's value — would be most affected by the hike.
Under the old system, that borrower would pay an insurance premium of $6,875 to get a $250,000 mortgage. Under the new system, the premium would jump by $1,000. On a typical 25-year mortgage at 3.5 per cent, that person would be paying about $5 more every month.
"This is not designed to affect housing market activity," CMHC vice-president Steven Mennill said.
Homebuyers in Canada are legally required to purchase mortgage insurance if they don't put down 20 per cent of the price of the home up front. The homeowner pays for the insurance, but the lender is the beneficiary — it covers their losses if the homeowner defaults.
The vast majority of that insurance is sold through CMHC, although some private companies also offer it. Those companies, including Genworth Financial and Canada Guarantee tend to match whatever taxpayer-backed CMHC is charging.
True to form, Genworth did exactly that later on Friday, raising its insurance premiums to match CMHC's.
"We believe this new pricing is prudent and more reflective of increased regulatory capital requirements," Genworth chair Brian Hurley said. "These pricing actions are supportive of the long-term safety and stability of the Canadian housing market."
Genworth shares jumped up by almost five per cent on the TSX following the news, a day after they gained more than three per cent as rumours of what CMHC was planning leaked out. Higher premiums mean more revenue for the insurer, which investors like.
CMHC charges a percentage fee for its insurance policies in the very low single-digits. Those percentages haven't been raised since the late 1990s, and were in fact lowered from 2003 until 2005.
"The higher premiums reflect CMHC’s higher capital targets” Mennill said in a release. “CMHC’s capital holdings reduce Canadian taxpayers’ exposure to the housing market and contribute to the long-term stability of the financial system.”
The increase will only affect new policies, not mortgages already in existence.
CMHC said the new rules will apply to owner-occupied units and one-to-four-unit rental properties. It will also apply to self-employed owners.
"This isn't going to have a big impact on the mortgage market," said Kelvin Mangaroo, the president of RateSupermarket.ca. "It's more about getting their capital reserves in line."
Considering how strong the housing market has been for the last decade, it's not surprising that the CMHC has moved to adjust the premiums it charges to insure all that pricey housing stock, he said.
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