CMHC insurance rate increase – Should you put 20% down now? Here’s the impact

If someone is telling you how expensive something is, a great way to make it not seem that expensive is to break one large payment down into a smaller frequent payment. So of course when Canada Mortgage Housing Corporation announced in January that insurance rates were going up for new homeowners, we had a laugh:

“CMHC is increasing its homeowner mortgage loan insurance premiums effective March 17, 2017. For the average CMHC-insured homebuyer, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment.”

In this case, the change in the insurance fee for someone buying a $400,000 house with 5% down is $1,600 up front. “For only an extra two Grande Starbucks Frappuccinos a month for 25 years you too can still own a home.” Right.

Here’s the actual table comparing the rate change, courtesy of a different CMHC page and not the press release. 

Not too long ago we calculated whether you should be putting 20% down on a new home or less based on what rate of return you think you can get on the money not put down (see here). Of course if you put less than 20% down you have to pay for CMHC insurance. Given the changes in CMHC rates and mortgage rates, which have also popped a bit, we decided to re-run the numbers.

What rate of return do you need now?

Quite amazing to see what a difference a bit of policy and interest rate change can have. You now would need to have an annual after tax return of 8.58% on your portfolio to beat the 20% down scenario and be worth more after 5 years. The 15% down scenario is even more punitive now and overall the “go big or go home” approach still prevails, i.e. either put 20% down or 5% down. We would also suggest that if you have 15% ready it would be worthwhile to try to wait until you have 20% (which doesn’t require CMHC insurance) as under a $500k purchase scenario that CMHC insurance is eating up $11,900 ($500,000 X 85% X 2.8*%). Ouch.