A Liberal Party promise to cut federal mortgage insurance rates by 25 per cent is unlikely to make housing more affordable, but will increase risks for taxpayers, industry experts say.
The proposed cut to the cost of Canada Mortgage and Housing Corp. (CMHC) insurance is one of a number of election campaign promises announced by Liberal Leader Justin Trudeau on Tuesday, aimed at dealing with the country’s housing affordability crisis and helping younger Canadians buy homes. But mortgage professionals and economists point out that the savings to buyers would be slim.
For example, the current cost of mortgage insurance on a $500,000 home purchased with a $475,000 loan is nearly $20,000. A reduction of 25 per cent would mean a savings of $5,000, or just 1 per cent of the total purchase price.
At today’s mortgage rates, the monthly payment on that home would go from around $2,100 to $2,075, according to calculations by mortgage broker Elan Weintraub, with Toronto-based Mortgage Outlet Inc.
“That is $25 per month. We are talking about real estate. That is four lattes. How is that changing the equation? They are still only getting a $500,000 property,” he said.
Since the pandemic started, low mortgage rates have made it much easier to borrow. That has contributed to a worsening of housing affordability across the country, as buyers use loans to make high offers on properties. The Canadian Real Estate Association’s Home Price Index, an adjusted measure of national housing prices, reached a record $730,000 in July.
Mortgage insurance, which reimburses a lender if a borrower defaults on a loan, is required when a borrower’s down payment is less than 20 per cent of a property’s total purchase price. CMHC insurance is guaranteed by the federal government, meaning taxpayers are on the hook if the federal insurer is unable to meet its obligations.
The 25 per cent reduction would pressure CMHC’s private-sector competitors, Canada Guaranty Mortgage Insurance Co. and Sagen MI Canada Inc., to match the lower rate or lose business.
They could try to prevent losses by taking on only borrowers who are relatively low-risk. That would leave the less creditworthy borrowers to CMHC, and increase the risk to the federal insurer’s books.
“There is a vulnerability, because ultimately the taxpayer is carrying the risk on insured mortgages,” said Craig Alexander, chief economist at Deloitte Canada. If there were a significant correction in home prices leading to a wave of mortgage defaults, he said, it would increase the likelihood that the federal government would have to step in.
Mr. Alexander said the cheaper insurance would only help in the short term, because the measure would likely increase demand for mortgages and contribute to higher prices.
“It will only have a small impact on affordability, and only for groups that take advantage of it soon,” he said.
Paul Taylor, president of the lobby group Mortgage Professionals Canada, questioned whether Ottawa could impose a lower rate without assessing CHMC’s financial health. “If CMHC or Canada Guaranty or Sagen suffer losses that they can’t settle and declare bankruptcy, the federal government has to make them whole. You are increasing the level of risk if you reduce capital that insurers can collect,” he said.
CMHC declined to comment, and the private sector insurers did not respond to requests for comment.
The policy proposal is incongruous with the federal government’s attempts to strengthen CMHC, said Don Drummond, an adjunct professor of economics at Queen’s University.
For years, Ottawa has tried to reduce taxpayer exposure to risky borrowers. In 2012, CMHC’s mortgage insurance business was placed under the supervision of the Office of the Superintendent of Financial Institutions. And CMHC has imposed minimum down payment requirements to qualify for its insurance and eliminated federal mortgage insurance for second homes.
“There has been a very concerted effort to de-risk CMHC in the housing market,” Mr. Drummond said. “This goes right in the face of that.”
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.