What CMHC‘s 15 per cent rate increase means for buyersMarch 7, 2014
Canada Mortgage and Housing Corp., the federal agency that insures mortgages, is raising its rates by an average 15 per cent on May 1.
Although this is not good news for homebuyers since it will add to the cost of many purchases, the overall impact isn’t disastrous.
If you have less than 20 per cent for a down payment, you must obtain mortgage insurance, either through CMHC or a private insurer such as Genworth Canada or Central Guaranty. The cost is typically added to your mortgage and paid over the 25 year amortized term.
The reason for mortgage insurance is that banks would likely not lend money to people who, for example, only have 5 per cent for a down payment, unless the mortgage is insured. CMHC essentially guarantees the loan to the bank so that if the borrower defaults and the property is sold at a loss, CMHC pays the difference. CMHC claims that they need to raise the premiums so that they have more cash in case more consumers default in the future.
For example, if you have a 5 per cent down payment today and want to borrow $300,000, the cost of mortgage insurance is 2.75 per cent or $8,250. You do not pay this up front. Instead, it is added on to your mortgage, so you would borrow a total of $308,250. Under the new rules, the rate would increase to 3.15 per cent, or $9,410, so you would borrow of $309,410 to net the same $300,000.
If you took a 5 year mortgage at 3.49 per cent interest today, your monthly payment would rise from $1,537 per month, to $1,543. This is an increase of $6 per month.
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As expected, on March 5, 2014
, the BANK OF CANADA
announced that it was maintaining its target for the overnight rate at one per cent. The Bank Rate is correspondingly one and a quarter per cent and the deposit rate are three quarters of a per cent.
The fundamental drivers of growth and inflation in Canada continue to strengthen gradually, as anticipated. With inflation expected to be well below target for some time, the downside risks to inflation remain important. At the same time, the risks associated with elevated household imbalances have not materially changed. The Bank judges that the balance of risks remains within the zone for which the current stance of monetary policy is appropriate and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.
The financial institutions will also keep their Prime Lending rate at 3%. With falling bond yields some of the financial institutions lowered their fixed rates and a 5 year fixed term is now around 3.29%; whereas variable rates continue to remain steady with 5 year discounted variable rates at Prime -.50%.
The next Bank of Canada Rate Announcement will be on, April 16, 2014.
To discuss your personal situation, contact one of our Mortgage Agents
Banks show restraint on mortgage rates one year after Flaherty's warningMarch 3, 2014
A year after being admonished for cutting mortgage rates too aggressively, banks are demonstrating a new, self-imposed restraint.
In March, 2013, Bank of Montreal dropped its five-year mortgage rate to 2.99 per cent, spurring Manulife Bank to follow suit as the all-important spring housing season kicked off.
Enraged because he had been trying to slow the market, Finance Minister Jim Flaherty intervened, criticizing lenders who slashed rates and publicly praising those who held pat. It was the second year in a row that a mortgage-rate war kicked off as spring approached.
This year, there is little evidence of a similar battle for market share. Mortgage rates typically follow five-year bond rates, but while bond yields are falling, banks are demonstrating little eagerness to engage in a race to the bottom for mortgage customers.
While some lenders are cutting rates, the big banks are staying well above the 3-per-cent threshold that triggered Mr. Flaherty’s ire. The lowest five-year fixed mortgage rate offered by a Canadian bank is now 3.49 per cent.
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Globe & Mail