In Canada, anyone who pays less than 20 per cent down on their home purchase is required to take out mortgage default insurance. The biggest provider of this insurance is the Canada Mortgage and Housing Corporation (better know as the CMHC). As the CMHC is a Crown corporation, it’s backed by government funds – and that means taxpayers are ultimately on the hook should any of those mortgage insurance policies go belly up.
It has been a mandated goal for the CMHC to reduce the risk of these defaults on Canadian taxpayers – and their 2014 annual report shows they’ve been successful. One of the biggest revelations was that the organization had lowered “the aggregate exposure of…mortgage loan insurance activity” by $14 billion last year. Sounds like great news – but some mortgage borrowers have felt the squeeze as a result. Here, we explain the biggest report highlights, and how they’ll affect your ability to borrow.
Mortgage Restrictions Have Been Effective
Anyone who’s paid even passing attention to the mortgage market over the past couple of years knows that the federal government has been very actively trying to avoid a mortgage-related financial crisis such as the subprime crash in the U.S. at the end of the last decade.
The government’s main arm for doing that is through the CMHC. Recent changes implemented to try and tighten up the mortgage market include:
•Reducing the maximum mortgage amortization period from 30 years down to 25 years.
•Lowering the maximum amount you can borrow when refinancing from 85 per cent down to 80 per cent.
•Cancelling mortgage insurance for secondary (i.e. rental) properties.
•Hiking the premiums on mortgage insurance in 2014, and hiking them further on applications with less than a 10 percent down payment earlier this year.
The overall goal is to reduce the amount of mortgages that Canadian taxpayers are ultimately on the hook for. With an overall cap set at $600-billion, these measures and others have helped shave $14-billion off the total outstanding, to $543-billion at the end of 2014. A mere 0.35% of insured customers are in arrears.
The long and short of it is that as housing prices continue to increase, would-be buyers will need to come up with larger amounts for their down payment, or pay higher premiums for insurance to cover any shortfall. Options include withdrawing up to $25,000 from your RRSPs under the Home Buyers’ Plan or escalating your personal savings strategy.
CMHC’s National Impact
Most Canadians first learn about the CMHC when they go to buy their first house and, if they don’t have 20 percent for a down payment, find out that they’ll have to buy mortgage insurance from the government agency (or from private lending firms offering the same product: Genworth Canada. The CMHC provided mortgage insurance for more than 300,000 houses and condo units in 2014.
The CMHC was originally founded by the federal government’s 1944 National Housing Act to help provide affordable housing and loans for vets returning from the Second World War – but today, along with being the leading provider of mortgage insurance, the agency continues to provide financing and support for low-income and assisted-living housing projects ($2 billion in 2014), produces information sheets for homebuyers and owners, and conducts market analysis of the trends in housing and real estate, such as its regular report on housing starts.