Effective May 1, 2014, the Canada Mortgage and Housing Corporation* (CMHC) will increase mortgage insurance premiums, imposed on the borrower, by an average
of 15%**. There is a lot of speculation about what this means for the mortgage industry in Canada so, let’s take a look at it.
Initial thoughts are that the overall impact will not be disastrous, as supported by the fact that CMHC and the federal government have been taking steps to moderate the housing market in Canada since 2010. These measures include (but are not limited to):
- borrowers need to qualify using a 5-year fixed rate regardless of term
- restrictions imposed on maximum amortization of insured mortgages over 80% loan to value (LTV)
- LTV limits applied to insured refinances
It is believed that this latest provision to increase mortgage premiums will serve as another tool to aid in the ongoing efforts of keeping the mortgage markets stable throughout Canada. CMHC Vice-President Steven Mennill indicated to the CBC that it is not designed to affect housing market activity.
According to the mortgage insurance agency, with the new premium schedule, the average Canadian homebuyer, requiring CMHC insured financing, with an LTV of 95% will bear an increase of $5 in their monthly mortgage payment. This increase in cost to the borrower may not seem material; interestingly, the recent increase in insurance premiums is intended to reduce the Canadian taxpayer’s exposure to the housing market while the intent of previous measures was to protect the borrower under future interest rate increases.
Although the majority of mortgage insurance is sold through CMHC, private companies such as Genworth Financial and Canada Guarantee, also offer similar mortgage insurance. As the private insurers tend to follow the lead of the CMHC, no later than a few days later, Genworth did exactly that, raising its insurance premiums to match CMHC.
“We believe this new pricing is prudent and more reflective of increased regulatory capital requirements,” Genworth chair Brian Hurley said to the CBC in February. “These pricing actions are supportive of the long-term safety and stability of the Canadian housing market.”
With the increase in the value of homes over the past decade in Canada, it is not surprising that mortgage insurers are taking steps to protect fully their ever-appreciating assets.
Geoffrey Crittenden, Associate Vice President, Securitization, Residential Markets
*CMHC has also committed to announcing its premiums during the first quarter each year, signaling that changes could become more common. Prior to this announcement, the last changes were between 2003 and 2005, when CMHC actually cut prices.