It was announced on January 17, 2017 that CMHC mortgage insurance premiums would be increasing for new home buyers who will be putting 15%, 10% and 5% down on a new mortgage. CBC described this as saying mortgage holders will be charged ‘slightly more’ every month. ‘Slightly more’ could actually cost you tens of thousands of dollar in the long run!
What is CMHC mortgage insurance
By law in Canada, anyone who puts down less than 20 per cent on the purchase of a new home must pay the CMHC mortgage insurance premium – a percentage of the total purchase that covers the mortgage issuer in the case that the borrower (home buyer) defaults on their mortgage. Unfortunately, this premium provides no actual benefit to the buyer, and is a total lost cost for them.
How much are CMHC insurance premiums rising?
Starting on March 17, these new premiums will be enacted:
| Down Payment | Premium prior to Mar 17, 2017 | Premium after Mar 17, 2017 | Increase |
|---|---|---|---|
| 15% | 1.80% | 2.80% | 1.00% |
| 10% | 2.40% | 3.10% | 0.70% |
| 5% | 3.60% | 4.00% | 0.40% |
| Non-Traditional | 3.85% | 4.50% | 0.65% |
The biggest increases are for those who are putting down between 15% and 20% as a down payment. These people will see an additional 1% of their total mortgage paid to their insurance premium.
What does this increase look like
Let’s take a look at the those hardest hit by the increase – those planning to put down 15% on a new home. Here is how the increase would affect homes in the $400,000 to $700,000 range with buyers planning on a 15% down payment:
| House value | 15% Down payment | Old premium (1.80%) | New premium (2.80%) | How much more you’ll pay |
|---|---|---|---|---|
| $700,000 | $105,000 | $10,710 | $16,660 | $5,950 |
| $600,000 | $90,000 | $9,180 | $14,280 | $5,100 |
| $500,000 | $75,000 | $7,650 | $11,900 | $4,250 |
| $400,000 | $60,000 | $6,120 | $9,520 | $3,400 |
A few thousand extra dollars spread over a 25 year mortgage might not seem too too painful. But that doesn’t take into account the mortgage interest you’ll pay on that few thousand, and the lost investment income that could have compounded over 25 years.
How does the mortgage interest affect the increase
For my analysis I’m going to use a mid-ranged priced home at $600,000 home with a 15% down payment. You may be buying a home that is worth more or less, and might be putting down a payment that is higher or lower, but for the sake of analysis, this is what we’ll use. Payments are calculated using Mortgage Intelligence’s Mortgage Calculator:
| House value | Down Payment | Mortgage value | Prior to March 17, 2017 CMHC premium | Total mortgage |
|---|---|---|---|---|
| $600,000 | $90,000 | $510,000 | $9,180 | $519,180 |
The current mortgage interest rates find themselves around 2.85% for a 5-year term, so we’ll use that for our example. In this case, our $519,180 mortgage would look like this:
| Monthly payment | Total Paid at amortization (end of the 25 year mortgage) | Total interest paid at amortization (end of the 25 year mortgage) |
|---|---|---|
| $2,417 | $725,164 | $205,984 |
Now let’s look at the new rates:
| House value | Down Payment | Mortgage value | Post Mar 17, 2017 CMHC premium | Total mortgage |
|---|---|---|---|---|
| $600,000 | $90,000 | $510,000 | $14,280 | $524,280 |
For a 5-year 2.85% interest rate, our $524,280 mortgage would look like:
| Monthly payment | Total Paid at amortization (end of 25 year mortgage) | Total interest paid at amortization (end of 25 year mortgage) |
|---|---|---|
| $2,441 | $732,886 | $208,006 |
This shows that over the 25 years, you would pay $2,022 of additional interest due to the increased premiums. All of a sudden, our $5,950 CMHC insurance premium increase looks more like $7,122.
What about lost investment income?
Looking at our $600,000 house example again – what if the extra amount that the new increased CMHC premium adds to our monthly mortgage payment was invested instead over 25 years?
| Monthly mortgage under old fees | Monthly mortgage under new fees | Extra cost per month |
|---|---|---|
| $2,417 | $2,441 | $24 |
$24 a month doesn’t seem too bad. Except small amount of money invested over very long periods of time can grow exponentially due to compounding interest.
Let’s say instead we invest that $24 every month into an index fund instead. Over 25 years, we can modestly say that investment might provide an average 6% annualized return. Investing $288 every year and having returns compounded could like like this:
| Amount invested every year for 25 years | Average annualized investment return | Number of years compounded | Total investment value at the end of 25 years |
|---|---|---|---|
| $288 | 6% | 25 | $15,801 |
That $24 per month you paid because of the increased fee could have been $15,801 of investment savings and income.
So where are we at
We’ve determined that over the course of the mortgage on a $600,000 house, you’ll end up paying an extra $7,122 due to the CMHC premium increase of 1.8% to 2.8% on a 15% down payment. We’ve also determined if that extra payment had been re-invested every month, you could have saved and earned $15,801.
This means a 1% increase could cost someone $22,922 over 25 years! I don’t know if I would call that ‘slightly more’.
A few extra notes
Using our $600,000 house with a 15% down payment shows one end of the spectrum of how the premium increases can affect someone’s long-term wealth. There will be a greater impact on houses that cost more than $600,000, and a lesser impact for those with a down payment between 0% and 15%. I also had to make a few assumptions in my calculations:
- The mortgage rate would stay the same for all 25 years. In reality, this will not happen! But we’re unable to predict rates that far down the line – so I used the same interest rate to simplify.
- That a person pays a monthly mortgage, and never makes additional payments.
- The investment income would be 6% annually. Again, impossible to know the investment income for this money, so I use 6% as a modest average.
Comments or suggestions?
Have any questions about my calculations, or feedback on this article? Leave a comment below, or email me at info@letstalkaboutmoney.ca.