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27 Feb

CMHC changes on their way.


Posted by: Darick Battaglia

The federal agency that backstops Canada’s housing market will make an announcement Friday that could affect the mortgage market and home buyers.

The Canada Mortgage and Housing Corporation is tight-lipped about what, exactly, it is planning to unveil Friday. But CMHC did confirm to CBC News that an announcement is in the pipeline. A spokeswoman for the agency declined to offer any specifics, however.

MAP: House prices across Canada The news will come out at 11 a.m. ET on Friday but exactly what’s coming is anyone’s guess.

The Globe and Mail speculated Thursday that the announcement could be related to the premiums homeowners must pay to get CMHC insurance. ‘Hiking premiums would be a strong move.’— president Kelvin Mangaroo

Under current rules, any prospective homeowner who makes a down payment of less than 20 per cent of the purchase price has to pay for CMHC insurance for their mortgage. That premium varies from anywhere between 0.5 per cent and 2.75 per cent of the price, depending on the size of the down payment.

According to the latest data available, the average Canadian home costs $388,553. A would-be buyer of that home with only five per cent down would need to pay the maximum CMHC premium — an extra $10,685 in that example.

“Imagine somebody looking to buy a house, all of a sudden having to pay a one per cent increase to 3.75 per cent?” Kelvin Mangaroo, the president of told CBC News Thursday.

“I could see them wanting to do something around the fringes of the market … but hiking premiums would be a strong move,” Mangaroo said.

Homeowners pay the premium, but the beneficiary of that insurance isn’t the homeowner. Rather, it protects the lender if the homeowner defaults on the loan. Ottawa caps mortgages at 25 years

Those premiums haven’t been raised since the 1990s — a time when the typical Canadian home cost less than half what it does today — and were lowered in 2005

Because it’s backed by the federal government, CMHC controls the lion’s share of the market in Canada. But it also competes with private insurers such as Genworth Financial and Canada Guarantee. Both those companies tend to match whatever CMHC charges, because they lack the size or scale to effectively compete on price.

Any move to increase premiums would be good for CMHC and its competitors’ bottom lines, something investors seemed to pick up on Thursday: Genworth shares were up more than three per cent on the TSX Thursday, despite the company having no other news.

Insurers should theoretically be charging more to guard against default, not only because they’re being asked to cover more valuable homes, and more homes overall, but also because the rules have also been repeatedly tightened in recent years as to how much they have to keep on hand to cover losses.

On the consumer side, the federal government has acted numerous times to rein in the mortgage market in recent years by tinkering with CMHC’s rules, lowering the maximum amortization period from 40 years at one time down to 25 today.

Ottawa has also increased the minimum amount that a homeowner has on hand before being legally allowed to buy a house. Today the CMHC’s minimum down payment is five per cent, but it was briefly zero not that long ago.

Mangaroo says it’s possible that Friday’s news will be something like increasing the minimum down payment requirement again — maybe up to 10 per cent — but he thinks it will be something much less drastic.

Others agree. “I don’t see any changes to mortgage rules,” Ben Rabidoux, president of market research firm North Cove Advisors Inc. told CBC News. “You could also see some move to ‘level the playing field’ with the private mortgage insurers by forcing a risk weighting on CMHC-insured mortgages or something like that.”