Would it shock you if we said that you quite likely could get a better mortgage rate if you scraped enough money together from your savings and a gift from mom and dad to put 5 percent down, than if you had a 25 percent down payment?
I'm sure it would and it's not making any news headlines, so read below as to how our Canadian government is "helping" us once again in the mortgage industry.
Through our various media channels and social media we've informed our clients about many changes the government has implemented in order to "protect consumers and taxpayers." The largest change in years was announced on October 3rd of 2016. We won't bore you with the details, but bottom line is that it became a whole lot more difficult for a lot of our clients to qualify for a mortgage towards the end of last year!
The hits kept coming for the start of 2017 with the government owned Canada Mortgage and Housing Corporation announcing increases to rate premiums on Jan 17th. I guess we should consider ourselves lucky because this time we were given a full two months warning before the changes take place - March 17th so Happy St. Patrick's Day! Not surprising at all CMHC's main private owned competitor Genworth Canada announced mirrored changes the very next day.
It probably went as a news headline blip to our clients, if it was noticed at all. Of course, because we live and breathe mortgages, it was a very big deal to us. There are two things that were bothersome about the news release that day.
- The release stated that the new premiums would equate to only 5 dollars per month! I'm sorry, but since when does the government position an unnecessary increase in buying a home in the same light as selling an overpriced water softener? Let's talk about the real cost to our consumers which on average is around $1500. It's not per month, it's tacked right on top of your mortgage amount; and you'll get the privilege of paying that off over the next 25 years!
- Who exactly are we protecting here? You'll see the table illustrated below of the changes in premiums. We were taught in the first day of broker school that the highest risk to a lender are those who have less of their own money or equity in their home. So if the much talked about housing bubble does occur, the people putting 5% down are a much higher risk of default than those with 20 or 25 percent equity in their homes correct? However, the increase in premiums is directly inverse to this logic. The increase in premiums for a client putting 20 percent down is going up a whopping 92% and to say thank you for putting even more down to 25 percent the premium equates to a 126% which means it will more than double!
- What we've not seen much of from main media sources is this segment for #2 which we refer to as "conventional financing." A lot of our customers looking to buy a home right now and have 5 or 10 percent down understand it's going to cost them more in a couple of months. However, anyone buying who is lucky enough to have a large downpayment, or is receiving a large chunk from the sale of their existing home is in for a surprise. Most or our lender partners insure mortgages with even 20% or 25% down in the back end with this mortgage default. The average consumer is not aware of it because they do not pay for it, however it's worth the cost to the lender as they can sell of that mortgage in various mortgage investment pools. With the cost of this insurance also going up, those increases are of course passed down to our consumers in the way of higher rates. So many lenders now have 2 rates for a mortgage: those with insurance and those without. That's why as stated at the top of this article someone with 5% down may very well receive a better rate on their mortgage than someone who has 25% to put down.
That's a very simplistic description of what's going on because this involves many other aspects such as new required reserve funds, changes in government backed securities, etc. These various scenarios can even quite drastically affect how much our borrowers can qualify for.
Bottom line is that a very complicated product and process, just became that much more complex. Now more than ever, you need to rely on the expertise of an expert that does nothing but deal in mortgages all day, every day.
Talk to one of our professional, highly experienced mortgage brokers about your unique situation.