Today’s big announcement from the Federal Finance Minister was that Canada is tightening lending rules for residential mortgages, setting the minimum down payment up to 10% on the portion of home prices over $500,000.

What this will mean to the Victoria and Vancouver Island Real Estate market is still anyone’s guess. There are some figures that suggest only 8% of purchases in Victoria require high-ratio mortgages where the buyers use less than a 10% down payment, so perhaps the moves won’t make a huge impact in this neck of the woods.

Despite this, high ratio mortgages where buyers make a down payment smaller than 20%, have become commonplace. 35% of new Canadian home purchases are insured with CMHC, Genworth or Canada Guaranty.

The cost of insuring these mortgages is shouldered completely by the buyer and is added onto the mortgage balance at funding. As you likely know, the upfront cost of this insurance is often a huge amount. Unfortunately, however, costs don’t end there.

What about the added cost of interest, over the term or life of the mortgage originating from the insurance premium tacked onto the mortgage?

This is what we’re going to find out!

Here is table explaining the upfront cost of mortgage insurance premiums for three separate mortgage amounts. The mortgage insurance premium rates are set by CMHC and are standard across all three insurers.

The mortgage insurance premium rates are set by CMHC and are standard across all three insurers.

Now, since these premiums are added onto the mortgage balance, and are accrueing interest, let’s see how much extra interest a homeowner will pay over the term and life of the mortgage. (Let’s assume a term is 5 years at 2.79%, and life is 25 years @ 3.5%)

As you can see the additional interest expense is substantial over BOTH the term, and the life of the mortgage. In the worst-case scenario, where a buyer puts down between 5 and 9.99%, they can expect to pay up to 5.4% of their original mortgage balance in both up-front insurance premiums, and additional interest expenses over the term of the mortgage.

Moral of the Story:

Additional interest expenses on CMHC Fees (that are added to a borrowers mortgage) are substantial, and onerous. The combined upfront and additional interest expense of mortgage insurance drains equity in a homeowner’s property and reduces a borrowers cash flow.

This stings a bit more considering the fact that mortgage insurance doesn’t even protect the homebuyer in the event of default – it only protects the bank for losses after a complete foreclosure proceeding. Furthermore, if Canada ever were to experience a serious housing crisis, it’s the Government that will be bailing out CMHC, putting homeowners and taxpayers on the hook again!

If you have the money to do so, you should: AVOID CMHC at all costs.

If you don’t have the money, and you want to own a home, mortgage insurance is unfortunately, a necessary evil. On the bright side, as nasty as the costs of mortgage insurance seem, they are relatively insignificant considering the historically positive trend of real estate being an excellent investment.

If you consider that at an average annual appreciation of 2%, your home will be worth 64% more in 25 years than it is now.

Mike Grace is an independent full-time mortgage planner and industry insider located in Victoria, BC. If you are purchasing, refinancing or renewing your mortgage, contact Mike to obtain the best available rates and terms.