First-time home buyers are among Canadians particularly sensitive to the continually rising cost of home ownership and to increasing inflation , now at 2.3 per cent. The Canada Mortgage and Housing Corporation's (CMHC) decision to lower the cost of mortgage borrowing for first-time buyers is a step towards offsetting these trends.

CMHC, our federal housing agency, recently announced "several enhancements to mortgage loan insurance, that would improve affordability for many Canadians." These reductions will reportedly amount to savings of approximately C$200 million annually, while continuing to make home ownership more accessible. Reductions for groups sponsoring affordable rental housing should indirectly assist tenants, too.

In 2004, CMHC approved mortgage loan insurance for over 650,000 homes or rental apartments. Mortgage loan insurance is also available privately . High ratio mortgages (those for more than 75 per cent of appraised property value) require mortgage loan insurance to protect lenders against borrower default or failure to repay individual mortgages or, in the case of developers, financing on housing projects.

Effective immediately, CMHC is lowering mortgage loan insurance premiums 15 per cent for first-time buyers with less than a 10 per cent down payment -- a drop from 3.25 per cent to 2.75 per cent. This means, a home buyer arranging a C$150,000 mortgage with 5 per cent down will save C$750.

(Note: CMHC will issue refunds directly to home buyers during a six-month transition period to provide financial institutions time to update systems and incorporate these costs savings at the time of the mortgage application.)

The premium, based on the amount of the mortgage in relation to the value of the property, is normally added to the mortgage balance on closing so borrowers may not feel the full relief of reductions. This benefit will, however, decrease the total interest that accrues against the amount originally borrowed, a decrease which, after years of interest compounding, could save thousands.

Borrowers who buy, or build energy-efficient homes are eligible for an additional 10 per cent refund on their mortgage loan insurance premium.

(See PJ's column "Mortgages Are Improving, But Are Canadian Borrowers? " which also explains earlier mortgage insurance improvements for self-employed Canadians and those who wish to purchase or refinance a second home.)

CMHC has also authorized a complete waiver of premiums for rental housing projects funded under the Federal Affordable Housing Initiatives which serve those in greatest need.

(FYI: This 2001 federal commitment to affordable housing has to date materialized in joint agreements with provinces and territories to a combined federal promise of C$1 billion in funding, but only about 16,000 units have been built across the country with an additional 4,000 units reportedly scheduled for development.)

Groups intent on adding to the stock of affordable rental housing will benefit from the complete waiving of mortgage insurance premiums for rental projects under the federal affordable housing initiative. According to CMHC, "in addition to savings in the order of C$300,000 on a $5 million loan with a loan-to-value of 95 per cent, sponsor groups will also benefit from the access to financing which mortgage insurance assures and the corresponding lower interest rates." Sponsors developing rental housing through CMHC's Canadian Centre for Public Private Partnerships in Housing, which has already facilitated creation of more than 38,000 housing units, will receive a 15 per cent mortgage insurance premium reduction.

A recent Bank of Montreal survey reveals that 16 per cent of recent first-time home buyers report their home payments (including mortgage, renovation and taxes) are difficult to manage, or makes them feel 'house poor.' Bank experts attribute this to a failure to enlist financial advice from a financial advisor (including a banker) although 77 per cent of recent house hunters report not seeking professional financial guidance.

Smart home buying does involve taking on realistic mortgage, renovation and property tax costs that will not become an intolerable burden if income stagnates or unexpected expenses crop up. Although a three- or five-year mortgage term appears to offer lots of financial breathing room, the balance owed will not see dramatic reduced by the end of this period. A key question is, "Would renewing in an environment of significantly higher interest rates bring undue financial stress or put the household in jeopardy?"

Rising real estate prices require re-evaluation of home-buying goals and plans, not automatic financial over-extension. Ideally, mortgage payments and taxes should represent "a small and manageable portion of household income" -- roughly about one-third.