The Canada Mortgage and Housing Corporation ( CMHC ) complex in Ottawa on Thursday Oct. 9, 2008.Sean Kilpatrick/The Globe and Mail
Canada Mortgage and Housing Corp. has raised mortgage insurance premiums for the first time since the 1990s, and signalled more hikes could be on the way.
The increases, which will apply to policies that are obtained from May 1 onward, amount to about 15 per cent on average. The move was quickly copied by rival mortgage insurer Genworth MI Canada Inc.
CMHC executives said the higher premiums would mean an extra $5 a month for a borrower with a 95-per-cent loan-to-value (LTV) ratio and a loan of $248,000. But the increase will be more sizable than that for many people.
The move is part of a transformational shift at the Crown corporation, which sits at the centre of the country's housing market. CMHC is attempting to behave more like a private-sector company as the federal government seeks to reduce the housing risks that taxpayers are taking on.
Mortgage insurance compensates lenders, including banks, when the mortgage borrower defaults. Federally regulated lenders are required to obtain the insurance for loans where the borrower has a down payment of less than 20 per cent. Lenders are technically responsible for the premiums, but in practice those are passed along to borrowers.
CMHC expects to take in an extra $150-million to $175-million this year as a result of the price increases, although that won't flow into profits right away because of accounting policies. The Crown corporation earned almost $1.28-billion during the first nine months of 2013. It had nearly $560-billion of insurance in force at the end of September, and insured loans for 386,222 housing units in 2012.
Finn Poschmann, vice president of research at the C.D. Howe Institute, said CMHC had not been charging enough to cover its risks in the past, and the increase is a good move.
"The impact will be trivial for the 80 to 85 per cent loan-to-value range," he said. "For buyers in the 95 per cent loan-to-value range, typically first-time buyers, the changes mean a significant pop to closing costs, in the neighbourhood of $1,500. In centres like the [Greater Toronto Area] or Vancouver, the typical hit will be a lot more." (Mortgage insurance premiums can be amortized over the length of the mortgage, rather than paid up front at closing.)
He said the impact in the Greater Toronto Area would be closer to $2,000 or $10 a month.
"This will make life more difficult for high LTV first-time home buyers in the big centres," Mr. Poschmann said. "Not huge, but certainly an incentive, on the margin, to get an offer accepted and a mortgage application filed before May 1."
CMHC made the decision to boost its premiums less than two months after the government installed former investment banker Evan Siddall as CEO.
CMHC's two private-sector rivals – Genworth MI Canada, and Canada Guaranty – told Ottawa late last year they were frustrated by CMHC's static pricing. They argued that higher capital requirements were hurting their profits, and said they would normally raise their prices in response, but felt hamstrung because CMHC is by far the biggest player in the sector. They have traditionally copied CMHC's pricing.
"Given today's announcement by CMHC, we are currently reviewing our pricing structure to understand potential implications," Canada Guaranty CEO Andy Charles said in an e-mail.
CMHC said Friday that from now on it will announce its premiums during the first quarter each year, signalling that changes could become more common. Prior to this the last changes were between 2003 and 2005, when CMHC actually cut prices.
Higher mortgage insurance premiums fit with Finance Minister Jim Flaherty's desire to reduce the risks that taxpayers are assuming by way of the mortgage insurance system. Mr. Flaherty has repeatedly stated that CMHC has grown to become something that extends far beyond its original mandate, and he has taken numerous steps to restrict its growth.
The Crown corporation was created in 1946 to help returning Second World War veterans find homes, and has become one of the country's largest financial institutions.
International observers, including the International Monetary Fund (IMF), have urged Ottawa to further reduce government's role in the mortgage-insurance market so that more housing risk is shared with the private sector.