When we talk about mortgages or mortgage insurance, we usually only ever talk about insured mortgages, since those are the ones covered by by CMHC, and we the tax-payers are on the hook for these loans.
Most of the changes to the mortgage world are brought about by CMHC, and only affect insured mortgages. But is it time the government looks at further restricting uninsured mortgages?
In a Globe & Mail article from a couple weeks back, the heads of Genworth and Canada Guaranty suggest the time indeed, has come…
Think of all the “big changes” that have come about in the Canadian mortgage market over the past few years.
The last one, the biggest we’ve ever seen, raised the minimum down payment on the value of a property between $500,000 and $999,999 from 5% to 10%.
Double anything is a big deal.
That change had been long-rumoured, and yet everybody was caught by surprise when it was enacted earlier this year.
How about the days of 40-year amortization? Those are long gone! Once upon a time, and unlike the fairy tales, “once upon a time” means only a few years ago, you could get a CMHC-insured mortgage amortized over 30, 35, or 40 years, thus decreasing your monthly payment, but increasing the amount of interest you would pay.
And remember when mortgage insurance premiums were lower?
The premium on loans with down payments from 5% to 9.99% went from 3.15% to 3.60% in June of 2015.
45-basis points might not sound like a lot, but consider the first-time condo buyer who purchases a $400,000 condo with 5% down. Under the old premiums, he or she would pay $11,970, and under the new premiums at 3.60%, he or she pays $13,680.
You can only imagine what those numbers look like when you start talking $800,000 houses…
All these changes, and yet, the market here in Toronto has yet to cool.
I think we all know that when new mortgage legislation is enacted, the intent is to cool the market. Changes in 2008 might have been proactive, after having seen the American mortgage crisis, but any changes in 2016, or in 2014 or 2015 for that matter, had one clear goal, and that was to stop the market from increasing.
in any event, none of it has worked.
And the government, and CMHC, are starting to look like they have absolutely zero impact on the market.
My fear, along with many others’, is that the government will overreact and do something drastic.
I mean, raising the minimum down payment from 5% to 10% for properties between $500,000 – $1M is pretty drastic, but I’m talking about something even larger, or more impactful.
There was an article in the Globe & Mail two weeks ago called, “A Warning On Mortgage Insurance Restrictions.”
In the article, the CEO’s of both of Canada’s private-sector mortgage insurers (with CMHC being the “public” insurer), Genworth and Canada Guaranty, suggest that targeting first-time home buyers will do little to slow prices.
Both men believe that the increase in down payment from 5% to 10% were aimed at Toronto and Vancouver, but that in the end, it hurts first-time buyers, and buyers in other markets.
Stuart Levings, CEO of Genworth, says of the effect on the Calgary market, “What was already a somewhat challenged market, now with that extra down payment requirement has just killed it even further.”
Andy Charles, CEO of Canada Guaranty, says that first-time home buyers make up roughly 30% of the Canadian housing market, which is down from as much as 50% in the past.
More changes to the mortgage market are coming if the market continues to rise.
Federal Finance minister Bill Morneau is putting together a “working group” to study the Canadian housing market, who will submit a report to the federal government by the fall, with recommendations on what, if any, actions should be taken.
You know me – I say, “Oh, good, another group/panel/committee/board will be created, to commence a ‘study’ that will cost tax-payers millions of dollars, so ‘findings’ can be submitted.”
But what else is the government supposed to do?
They’re out of ideas.
B.C. Premier Christy Clark is blaming the real estate industry for prices in Vancouver. What else is she supposed to do?
The word “crisis” is increasingly being used along with “real estate.”
John Bruk wrote a fantastic piece in the Globe last week called, “Canada’s Housing Crisis: The Time For Study Has Passed.”
In the article, Bruk basically blames government inaction, and a “wait and see approach” by all three levels of government, who have sat back and done nothing as prices have skyrocketed.
Bruk makes suggestions for change – all of which have to do with foreign ownership.
But there is one more change the government can make before going the foreign route, and that has to do with those uninsured mortgages that we never talk about.
We’ve seen insurance premiums raised, down payments for insured mortgages raised, and amortizations for insured mortgages lowered – but nothing with respect to those insured mortgages.
Homes valued above $1,000,000 and second properties and/or investment properties don’t qualify for mortgage insurance, and buyers with 20% down payments under $1M don’t need mortgage insurance.
So is it time the government takes a kick at that can?
Is it time the government raises the insurance floor from 20% to 25%?
Is it time the government eliminates 30-year amortizations for uninsured mortgages?
Is it time the government raises the minimum down payment over $1,000,000 from 20% to 25% or even 30%?
Should there be a massive sliding scale for homes over $2M or $3M? Say, the 20% down payment rises to 40% for the portion above $2M? Or are we naive enough to think that every buyer of a $3M home is doing so in cash?
Personally, I don’t like these ideas. But I’m putting them on the table for discussion because I know the federal government soon will.
Again, from the Globe & Mail article, the CEO’s of Genworth & Canada Guaranty suggest that the maximum 25-year amortization for insured mortgages should be matched by those of uninsured mortgages as well. Currently, borrowers with 20% down can get a 30-year amortization, thereby lowering their monthly payments, and making purchasing more affordable.
The CEO of Genworth also suggests that the minimum down payment for uninsured mortgages should be raised from 20% to 30%.
But are these guys making suggestions on what’s best for the country, or the real estate market? Or are they making suggestions that will help Genworth and CG make more money?
I don’t believe that any more changes can come to the market for insured mortgages.
Premiums at 3.60% for those with 5% down are already bloated. They can’t go any higher.
The down payment minimums can’t be raised anymore. Can they?
The maximum 25-year amortization can’t be lowered. That would be ludicrous.
But if the government still wants to believe that it can cool the red-hot real estate market through legislation, they’re either going to have to make more changes through CMHC, or finally increase the down payment for uninsured mortgages.
Of course, they could tackle foreign investment, but I fear that’s difficult, and the government historically doesn’t like “difficult.” It’s much easier to stick to what you know, and what you can control, and the Bank of Canada controls CMHC.
So let me post the simple question, with the seemingly obvious answer:
Which of the following should the government act on:
1) CMHC-insured mortgages
2) Uninsured mortgages
3) Foreign purchases