New 30-year mortgages for first-time homebuyers come with extra costs.
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If you’re a first-time homebuyer, mortgage default insurance is an additional and often necessary cost to get your foot into the door of an increasingly expensive housing market.
“If you pay less than 20 per cent on your purchase price, you’re a high-ratio borrower, and that requires your mortgage to be insured,” says Penelope Graham, director of mortgage content at Ratehub.ca.
“This is because you have less equity in your home and in the eyes of your lender, that makes you a higher risk for default on your mortgage payment.”
The most recognizable provider is Canada Mortgage and Housing Corp., a crown corporation, but two private firms also provide coverage: Canada Guaranty Mortgage Insurance Co. and Sagen MI Canada Inc.
“There really isn’t a reason to go with one over the other,” she says, noting the premium costs are largely the same.
Rather it’s the lenders that choose the provider.
“The lender might have a preference for an insurer,” Graham adds. “And some insurers might like different kinds of mortgage deals.”
As for the insurance premiums, the cost is four per cent of the mortgage amount for a five per cent down payment. It’s 3.1 per cent for 10 per cent down payments, and at 15 per cent down or more, it is 2.8 per cent.
Typically, first-time buyers can only qualify for a 25-year amortization on a mortgage — though individuals with 20 per cent down payments can get up to 30 years, Grahams says.
But a recent rule change, announced in the spring federal budget taking effect Aug. 1, allows for first-time buyers with less than 20 per cent down payments to get 30-year amortization mortgages for newly built homes.
“I am guessing (the feds) want to keep the new construction business strong and think this will help, but with it being limited to only first-time homebuyers, I am not sure how much good it will do,” says Matt Leggett, senior vice-president and mortgage broker with Ratehub.ca in Calgary.
It’s unlikely many first-time buyers, for instance, are able to purchase a new single-family detached home in Calgary or Edmonton, given current prices.
In Calgary, the average cost of a new single-family home was about $760,000 in June, and in Edmonton, it was about $588,000.
“First-time homebuyers tend to have less money for a down payment, and that likely limits them, especially in larger markets, to condos,” Graham says.
As well, the extended amortization requires a higher default insurance premium, an additional 20 basis points (0.2 percentage points), she says.
Ratehub.ca calculations show that on a $400,000 mortgage for a new home, the premium cost for default insurance for a 30-year amortization would be about $13,200, based on a 10 per cent down payment. The premium cost for a resale home of the same price would be $12,400 per year.
Graham says that Sagen and Canada Guarantee had initially come out with higher premiums, but CMHC then announced its additional charge would be 20 basis points, which led to its competitors lowering their premiums.
The premium rate for mortgage default insurance remains in place for the length of the mortgage term.
“Then when you renew, depending on how much equity you have in your home, you might have the option to switch from an insured to an uninsured mortgage,” Graham says.
That said, rates tend to be better for insured mortgages “because the risk is shouldered by the insurer.”
In turn, renewing borrowers whose equity is more than 20 per cent of the home value should consider whether it’s better to increase their leverage — rolling in other high interest rate debt, for example — to qualify for an insured mortgage at a lower interest rate, she says.
“At that point, it’s something to discuss with your mortgage professional what is the best route to save the most money over time.”