If you own a home or have ever purchased a home but did not have more than 20% to use as a down payment chances are that your mortgage needed to be insured by CMHC or another company. Mortgage insurance helps banks and lenders in the event that you stop making mortgage payments and your mortgage goes into default. The insurance premium charged by CMHC and others is passed on to you the borrower and can add up to 2.90% to your mortgage amount. The largest insurance provider in Canada is actually the Canadian government through the Canadian Mortgage and Housing Corporation. Yes you read that correctly. The government charges banks insurance premiums that get passed to you so that if you default on your mortgage the government will ensure the bank doesn’t suffer a total loss.
Mortgage insurance has been a very important tool for the government to use in not only stimulating housing activity but also making sure that through the down turns that first time home buyers and others who may not have enough money can purchase a home and enjoy home ownership.
If you read today’s paper you will most like see articles about the IMF taking a position that the Canadian government should ease its way out of mortgage insurance for many reasons. As CMHC is the largest insurer in the country any sign of the Canadian government backing away will cause ripples that could ensure our economy stalls or even chokes. This is because residential homes are a pillar of our economy. If people cannot purchase homes they way they have been over the past few decades the economic activity associated with the housing industry could really slow to a halt.
I think it is unreasonable to expect that the Canadian government will back out of the market immediately but do agree that there should be a plan for turning mortgage insurance to the private sector. There is a lot of work to be done before this could happen and hopefully our market remains stable while we wait.
“Insurance: An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.” – Ambrose Bierce
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I have a foot on each side of this fence. On one hand eliminating mortgage insurance would have the effect of pulling up the housing ladder behind those of us already on it. On the other, I question whether mortgage insurance should be available for residential properties significantly above market mean. For example, should an insured mortgage product be available to buy a $1MM property in Vancouver? Low rates and high ratio mortgages can have the impact of adding fuel to the fire of a boom, and have the effect of making housing even more affordable. It’s a bit of damned if you do, damned if you don’t circumstance. Perhaps a nuanced set of guidelines and thresholds would be in order as apposed to blanket policies?