Planning to pay less than 20 per cent on your home purchase? You’ll be joining a shrinking pool of buyers who require mortgage insurance from the Canada Mortgage and Housing Corporation (CMHC). The Crown corporation stated in its annual report that it is underwriting less mortgage insurance, and that it has plans to reduce the amount even further.
In the report, CMHC states it insured $557 billion in high-ratio mortgages in 2013, a drop from $566 billion in 2012. The report forecasts it will insure even less in 2014, probably around $545 billion. The decline comes as a result of tightened lending rules, which the government last tweaked in Summer 2012. Now new rules implemented by the CMHC will lead to even fewer homeowners qualifying for mortgage insurance… and CMHC is ok with that.
Stricter Lending to Come
Worried about an overheated housing market, the late Finance Minister Jim Flaherty introduced stricter measures four separate times to curb out-of-control borrowing. To highlight the current rules, amortization is capped at 25 years on CMHC-insured mortgages. As well CMHC does not insure mortgages on homes with a purchase price of more than $1 million. You have to have at least 5 per cent down and your total debt load can’t be more than 40 per cent of gross household income. Now, CMCH is also saying it will not insure second homes and be stricter with mortgage insurance for self-employed people.
Who is Affected?
CMHC insures mortgages for anyone buying a house with less than 20 per cent down. This protects the borrowers and the lender if the homeowner no longer was able to make payments and the mortgage went into default. After all, it was dodgy mortgage loans behind the housing meltdown in the U.S. in 2008-2009. This has led the Federal Government and the CMHC to tighten rules even further to ensure Canada’s housing market remains protected. Remember, if you have 20 per cent down none of these rules apply and you will be able to buy a home without getting insurance.
Why is CMHC Shrinking its Portfolio?
There was a time when CMHC insured more almost 80 per cent of high-ratio mortgages in Canada. Now that number is around 60 per cent. Indication is that CMHC’s market share of insurance mortgages will fall to 50 per cent in the near future, as homeowners use private insurers to protect their mortgage.
There is speculation the government is trying to get out of the mortgage insurance business and pass that responsibility on to private insurers. Having a good healthy mortgage market with protected mortgages is vital to the Canada’s economic future, it keeps a steady stream of property taxes flowing. As well consumers remain comfortable with spending if they know their mortgage payments are under control.