If you’ve been following the financial news in Canada lately (or if you read the blog here regularly), you will know that a lot is changing in the world of mortgage financing. Most recently, the Canadian Mortgage and Housing Corporation (CMHC) announced an increase in their insurance premiums that will come into effect on March 17th 2017. And although we are still in early February, we’re already feeling the impacts of this change. As odd as it sounds, one of these impacts surrounds making a bigger down payment.
Coming up with a bigger down payment doesn’t necessarily mean you will be able to secure a mortgage with the lowest interest rate available on the market. In fact, in today’s market, lenders favour borrowers with a five per cent down payment, compared to borrowers with a 20 per cent down payment. These borrowers can access mortgage products with a slightly lower interest rate. But it’s all really a matter of optics – here is what is really going on!
High ratio mortgages (less than 20 per cent down payment) require mortgage default insurance. The borrower incurs this cost, and it’s usually included in the cost of the mortgage. So, let’s say you have a five per cent down payment. With the latest CMHC premium increase, you would be paying a four per cent insurance premium. That adds a significant amount of money to the mortgage.
Conventional ratio mortgages (more than 20 per cent down payment) don’t require mortgage default insurance. However, a lot of lenders opt to insure these mortgages anyway. The lender incurs the cost to insure the mortgage as a cost of doing business. This is where the change took place. With the latest increase in premiums to insure mortgages, it’s gotten a lot more expensive for lenders to insure their mortgages against default. This is a cost that they can’t pass along to consumers as a fee, such as what happens with high ratio mortgages. Instead, they simply increase the mortgage rate to make up the difference.
This leaves the market in a very interesting (and sometimes confusing) spot. It would seem like the less money you put down, the better rate you are able to secure. However, that isn’t really the case. Instead of an additional cost the lender includes in the price of your mortgage, you’re just paying the cost of the default insurance as an added fee.
Now, if we are being honest, rates are really good right now. We are at near all-time historic Canadian lows. Comparatively, any rate today is a good rate! Are you looking to discuss your options and figure out the best mortgage product for you? Please don’t hesitate to contact me anytime!