June 10th - 2007

Mortgage insurance changes may not be a good thing

For the last 40 years, homebuyers have been required to buy mortgage insurance unless their down payment totalled at least 25 per cent of the purchase price.

For the last 40 years, homebuyers have been required to buy mortgage insurance unless their down payment totalled at least 25 per cent of the purchase price. But a new federal law came into effect this spring that lowers the level to 20 per cent and some lenders have been quoted as saying that the change could save homebuyers around $2,500. However, many others have commented that the people who most need mortgage insurance – first time buyers – will not see much benefit from the change.
 
“First time buyers are not usually approaching their first home purchase with anything like 20 per cent down payment,” says David O’Gorman, President of MortgageLand Inc. and an OREA instructor. “It is the exception to the rule to find first time buyers with more than 5 or 10 per cent down.” Not only does O’Gorman feel the new law is unlikely to have a positive effect on first time buyers, but it could in the long run hurt lower down payment, first-time borrowers if they are forced to pay a higher premium to make up for the mortgage insurers’ lost revenue. “If the lower risk business is being eliminated as a source of revenue, it would seem obvious that the higher risk business may end up paying higher insurance premiums.”
 
The small percentage of first time buyers who could come up with 20 per cent down prior to the law changing usually found a way around paying mortgage insurance premiums anyhow, says O’Gorman, so this new law has little impact for them. “Any buyer that has received adequate advice from their mortgage broker would find an alternate way of arranging their financing and avoid paying this premium,” he says. “Prior to the law changing, and using an average Toronto house of $350, 000 as an example: with 20% down ($70,000) a borrower would have had to pay $2,800 (1% of the mortgage amount) in High Ratio Insurance premium. If a borrower had access to an additional $17,500 in down payment then they would have avoided the high ratio premium all together and saved the $2,800.00. Also, because the premium is usually borrowed and added to the mortgage, they would save the interest paid at the mortgage rate over the life of the mortgage. Given the large down payment in this circumstance, most mortgage brokers would have arranged a loan or line of credit of $17,500 for a client to use as the additional down payment therefore avoiding high ratio insurance.”
 
What 80 per cent LTV (Loan to Value) Ratio does mean is that Canadian Mortgage Backed Securities (MBS, securities backed by CMHC insured mortgages) may be sold into the American financial markets and can be more readily compared to American MBS. In the US, the dividing line between high ratio insured and conventional mortgages has been 80 per cent LTV for decades. “The Office of the Superintendent of Financial Institutions (OSFI), the regulator of larger Canadian financial institutions, is also going to have to keep a weather eye on the content and management of their lenders’ un-insured mortgage portfolios because, as in any real estate market, corrections could be devastating to the financial industry,” O’Gorman warns. “Even in a moderate downward market, with a reduced sale price, mortgage arrears, real estate commission, legal fees and other costs associated with a power of sale, it would not take long for 20 per cent equity to disappear, with no default insurance and nothing but shareholders to absorb the loss.”

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Jean-Adrien Delicano

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Ontario Real Estate Association
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