Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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CMHC - Insurance In Force - Q3-2013  ($ billion) CMHC - Total Insurance In Force - Q3-2013  ($ billion)CMHC covers the lenders at the expenses of the borrowers. If you are at the borrowing end of the stick then the pain is yours. In order to own a home -if you do not have enough money –  your mortgage has to be secured against any payment default – by an insurer.

There are lenders who will give you money without such backing but the interest rates are high. By paying a low fee to CMHC or others we can access lower interest rate.

If there is no CMHC today then the lenders are worst off than the borrowers. The major issue will be to raise funds for lending. Loans that are not backed by the insurance are hard to sell.

If you can’t buy a home now then you shall just extend the renting – may by paying a bit more. If the banks can’t lend then they will be in trouble. Therefore apart from helping borrowers, CMHC helps the lender as well.

Since the beginning of this year the Canadian Government have been charging a risk fee of 2.25% of gross premiums written – to the private insurers. Now it has decided to charge 3.25% risk fee on CMHC. Actually whatever the fee is called – it is like right hand giving to the left – it ends up in the middle pocket.

As per CMHC’s quarterly report

Pursuant to section 8.2 of the NHA, effective 1 January 2014, the mortgage loan insurance activity will be subject to a risk fee payable to the Government of Canada of 3.25% of premiums written and 10 basis points on new portfolio insurance written.

Now section 8.2 of the National Housing Act says

The Minister of Finance may fix a fee to be paid by the Corporation to the Receiver General to compensate Her Majesty for Her exposure to the risks covered by Her agent the Corporation arising from the insurance relating to housing loans. That Minister shall notify the Corporation in writing of the fee.

So a communication was sent to CMHC – asking to start making such payment from next year (2014). Probably everyone is looking for ways to make a surplus next year.

Impact on borrowers?

In one word – minimum – from the risk fee. There is no big impact of this fee on the borrowers directly. A small amount may come in but it will not be noticeable.

A Bloomberg report quotes National Bank Financial analyst Peter Routledge – that the rate will go up by 10 basis points for a borrower. It is unlikely to happen in reality where the rates have no real datum.

There will be direct impact on the borrowers if the insurance premiums rise.

What other insurers are saying:

The private insurers reported to be ranting about the stalled rates in Canada. Actually they are missing the point of low inflation and skyrocketing home prices. Although their insurance premiums can’t be jacked up because of CMHC but they are making more money because house prices are more.

So, the morale of the story is that everyone wants more by doing as little as possible. But given the market condition and political confusions – everything is possible. We may see default insurance premium going up in future.