First-time homebuyers targeted with mortgage-insurance fee hikes

For lowest down payments, a slight increase

Canada’s largest private mortgage default insurer raised its premiums Monday, adding to the financial burden for buyers with less than a 10% down payment — usually first-time homeowners. The move by Genworth Canada Inc., which matches an increase announced Thursday by Canada Mortgage and Housing Corp., will raise insurance costs by 15% for those Canadians with the highest debt-value mortgages allowed by Ottawa.

“While [it’s] a prudent move to manage taxpayer risk at CMHC, young Canadians are the ones who bear the burden,” said Phil Soper, chief executive of Royal LePage, who generally applauded the move.

But he added that the CMHC and Genworth fee increases, while aimed at Canada’s two white-hot urban markets, may be felt elsewhere.

“The insurers have no way to surgically apply it there [Vancouver and Toronto] alone. So the entire country will feel the impact of the increase,” said Mr. Soper, who nevertheless downplayed the changes.

“The premium increases only impact the mostly highly leveraged home buyers and, while significant in percentage terms, I don’t believe it will be viewed as a material change in absolute dollars.”

He suggested the federal government could help more. “It is important that we regularly review and adjust important home ownership support initiatives, such as the Home Buyer’s Plan, to reflect the changing realities of today’s housing market,” said Mr. Soper, referring to the program that allows Canadians to withdraw $25,000 from their RRSP and pay it back without penalty.

For homeowners with less than 10% down, the premium on the total amount of their mortgage will jump from 3.15% to 3.6%. It goes into effect on June 1 for both CMHC and Genworth. Canada Guaranty, the country’s other private insurer, has yet to announce an increase.

Homeowners with less than a 20% down payment must get mortgage insurance if they are borrowing from a financial institution regulated by the Bank Act. Buyers must also have at least 5% down.

“This new pricing is reflective of higher capital requirements and supports the longterm health of Canada’s housing finance system,” said Stuart Levings, president and chief executive of Genworth Canada, in a release. “We believe these changes will not have a material impact on affordability.”

Genworth noted that for first-time homebuyers with a 95% loan-to-value mortgage of $300,000, the change amounts to a $6 increase in their monthly payment based on a 2.79% interest rate and a 25-year amortization period.

Rob McLister, founder of ratespy.com, said insurers are padding their margins and doing it for loans that usually result in the least amount of money recovered during defaults.

He noted that the increase for consumers comes as mortgage rates continue to drop, with TD Canada lowering the rate on its five-year fixed-rate closed mortgage to 2.74%.

“This isn’t a big enough cost to keep a meaningful number of people from putting down less than 10%,” said Mr. McLister, about the premium hike. “Now if you raised it 8% to 10%, that’s a different story. But an extra $5 a month will not dissuade anyone.”

Helmut Pastrick, Vancouver-based chief economist with Central 1 Credit Union, said the increase in premiums could affect some buyers who are on the margin.

While the move may target riskier loans in the housing market, there doesn’t seem any appetite to increase the minimum down payment from 5% to 10%. “I don’t think the [down payment] should go higher. Our underwriting has improved significantly and the quality of mortgage credit issued today is a high as it has ever been,” said Mr. Pastrick.

Young Canadians are the ones who bear the burden