By Brandi Pierik
Dagnabbit they’ve done it again!
CMHC made further changes to their mortgage default insurance product offering. So what does this mean to you? Well dear friend, if you are planning to purchase a home after May 1, 2014, you will want to read on for certain.
So, first, let’s look at what the heck CMHC even is. CMHC is the Canadian Mortgage and Housing Corporation.
It is a government-backed agency used mostly by home buyers who have provable taxed income and have at least 5% but less than 20% down payment. CMHC insurance is a product that protects the lender that you are borrowing money from.
From a lender’s perspective, if you are putting down less than 20%, you are a slightly riskier borrower and CMHC insurance protects them from you possibly defaulting on your mortgage. The CMHC insurance premium is paid by you, the borrower and can be paid as a lump sum, or most often is rolled into your mortgage and amortized along with the rest of the funds you are borrowing.
Here is a table showing what those premiums look like right now, compared to what they will look like after May 1:
Loan-to-Value Ratio Standard Premium (Current) Standard Premium (Effective May 1st, 2014)
Up to and including 65% 0.50% 0.60%
Up to and including 75% 0.65% 0.75%
Up to and including 80% 1.00% 1.25%
Up to and including 85% 1.75% 1.80%
Up to and including 90% 2.00% 2.40%
Up to and including 95% 2.75% 3.15%
90.01% to 95% – Non-Traditional Down Payment 2.90% 3.35%
So, if you have provable income, the changes will have little effect on you. Fabulous news, right? Right!
But what happens if you have non-traditional income? For instance, many of our self-employed clients have chosen to keep as much money in their businesses as possible. The reasons for this business structure are many, and if you are self-employed, I encourage you to consult with a qualified accountant or tax planner to be sure that your income is properly managed and accounted for.
The challenge is that if you, as a borrower, have chosen to leave a good portion of your earnings in your corporation or limited company, you are saving money by not paying as much personal tax but your personal tax returns will not reflect your total income.
The good news is that many lenders have programs for you.
You are able to utilize a stated income product and have enough income in your application to your lender to show that you can afford the home you are dreaming about. CMHC also provides extra security to those lenders with their stated income insurance product. If you qualify for the CMHC stated income product, your premiums are also going to jump after May 1.
Here is a table to show what that increased cost will look like for you:
Self-Employed Borrowers without Third Party Validation of Income
Loan-to-Value Ratio Total Loan Amount Increase to Loan Amount
Up to and including 65% 0.90% 1.75%
Up to and including 75% 1.15% 3.00%
Up to and including 80% 1.90% 4.45%
Up to and including 85% 3.35% 6.35% *
Up to and including 90% 5.45%* 8.05% *
As you can see, your costs are going to be higher as well. In fact, self employed stated income borrowers are going to feel the pinch more than borrowers who have traditional taxable income.
But don’t despair!
I have some positive news for you as well. You will notice on that chart above that even if you are putting down more than 20%, your lender will be charging you a CMHC premium. If that is the case, please consult with your mortgage professional to see if you are eligible to borrow funds from an alternative lender. Some alternative lenders charge a slightly higher interest rate, but do not charge the CMHC premium, so it may be less expensive to arrange your mortgage through their channels. Your mortgage professional will be able to run numbers for you both ways so that you can compare and make the informed decision that is right for you.
If you have more questions about the changes that are coming, CMHC has provided some answers to your FAQs on their web site at CMHC.ca
Brandi Pierik is an accredited mortgage professional with DLC Regional Mortgage Group.