Mortgage premium hikes reduce case for borrowing to boost down payment

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With mortgage insurance premiums rising, homebuyers whose down payments are just shy of 20 per cent may be considering whether to tap extra sources of credit in order to avoid the higher costs.

But mortgage brokers say recent government rule changes lessen the case for doing so because people may end up paying a higher interest rate on their mortgage in addition to the additional debt they will have to repay.

"What we're seeing in the market now is people that have insured mortgages are getting much better interest rates than someone with 20 per cent down," says Steve Pipkey, co-founder of Vancouver-based Spin Mortgage.

Ottawa announced new restrictions last fall to portfolio insurance, a type of bulk insurance that lenders would use to insure mortgages with down payments of 20 per cent or more.

That has made it more difficult for lenders to insure mortgages with lower loan-to-value ratios and resulted in more competitive rates for borrowers with smaller down payments, brokers say.

According to Pipkey, a borrower can get a rate as low as 2.44 on a five-year fixed insured mortgage, whereas if they have more than 20 per cent down, the rate will be more in the range of 2.69 per cent, depending on individual circumstances such as one's creditworthiness.

Canada Mortgage and Housing Corp. announced in January that mortgage premiums would be rising effective March 17.

Those with down payments of around five per cent will now pay mortgage insurance premiums of four per cent, up from 3.6 per cent, while down payments of 10 per cent will now cost 3.1 per cent in insurance premiums, up from 2.4 per cent.

Those with a 15 per cent down payment will see their premiums rise to 2.8 per cent from 1.8 per cent, and those with 20 per cent down will now pay 2.4 per cent for mortgage insurance, up from 1.25 per cent.

"There's definitely a skew towards increasing the premiums more for people that have a little bit more of a down payment available," says Marcus Tzaferis, a Toronto-based mortgage broker with MorCan Direct.

In the past, many borrowers close to the 20 per cent threshold would consider taking out a secondary loan – for example, through a line of credit – to increase their down payment and avoid mortgage insurance premiums.

"So if somebody had 15 per cent down, they would probably consider borrowing five per cent to get to 20 per cent down and avoid having to pay an insurance premium altogether," Tzaferis says.

But now, people within that threshold who have somewhere between 10 and 20 per cent down are reconsidering that approach, Tzaferis says.

"There's a lot of tinkering going on right now," Tzaferis says. "There's a lot of interest rate changes. There's a lot of insurance changes. There's a lot of regulatory changes, and it's creating a really complicated landscape for the Canadian borrower."

Tzaferis recommends seeking out unbiased advice when trying to determine the best approach.

If you are still considering taking out a secondary loan, Hamilton-based broker Blair Anderson says it's important to consider how quickly you will be able to pay off that debt.

Also, keep in mind that the additional debt will be added in when the bank calculates your debt-service ratio, which lenders use to determine how much you can afford in monthly payments.