By now you’ll have probably heard something about Mortgage Default Insurance. This is the Government sponsored insurance that makes it less risky for Banks to give mortgages. This insurance must be purchased by the lender for mortgages where the client has a small down payment (less than 20% of the property value), commonly known as High Ratio mortgages. It can also be purchased for Conventional Mortgages where the Borrower holds greater than 20% in equity in the property. This insurance is provided through CMHC and to a lesser extent Genworth and Canada Guarantee.
When the world ran into economic trouble in 2008, Banks began Government insuring Conventional Mortgages (remember these are mortgages where consumers hold equity positions in their homes in excess of 20% of the value). They did this to increase the stability of their balance sheets. Insuring allowed them to easily sell these Government insured mortgages should they need the liquidity. The strategy worked so well for the Banks that they insured over $60 Billion in these less risky mortgages. CMHC has a $600 Billion cap for this type of insurance. It used to be the cap was set every so often by the Government of Canada, and now that this cap is almost being reached the Government has decided that these conventional mortgages should no longer be insured. By not increasing the cap on these conventional mortgages they have effectively increased the cost to insure them
Bulk Insurance on conventional mortgages has been around since before the financial crisis in 2008. The Government used the Bulk Insurance to help the Banks when they needed it to bring financial stability into the market, now the Government and the Bank of Canada are using the removal of Bulk Insurance to bring financial stability in another fashion. The Governor of the Bank of Canada wants to cool the housing market, and without increasing the prime rate which will have a dramatic impact on the market the next best thing is to limit Bulk Insurance. Limiting Bulk Insured Mortgages forces up the interest rates on conventional mortgages, as Lenders look to be compensated for the additional risk, or the now increased cost of insurance from Genworth and Canada Guarantee.
So, where does this leave us?
As a response to CMHC’s departure from Conventional Mortgages, Lenders find themselves turning to the other Insurers active in the Canadian marketplace (Genworth and Canada Guarantee) to insure their mortgages at a greater cost, which is being transferred onto the consumer.
Smaller Lenders are having a hard time maintaining previous spreads between bonds yields and mortgage rates on conventional mortgages because of the increased insurance cost. For example, one lender is offering a rate of 3.29% on a 5 year fixed for high ratio deals, but 3.39% for conventional deals. This difference doesn’t sound too large, until you do the math. Over the course of 5 years, on your $500,000 mortgage, you’d pay up to $3500 more in interest!
Lenders are either splitting the rates (insured vs. non-insured), as in the case above, or raising rates altogether. The big Banks are thriving in the new environment as they are able to increase their mortgage rates even if they are not buying Mortgage Insurance from the Insurers left in the market.
We are ok with the idea of increasing mortgage rates, rather cleverly by limiting bulk insurance, but not so ok with the fact that the Bulk Insurance limit was eaten up by the same big Canadian Banks who are now the only lining their pockets with increased mortgage rates, and no default insurance expense. There was a great article written recently in Canadian Business magazine that we had pleasure of consulting on, you can give it a read here.
One thing is for certain, the role of a mortgage broker is becoming more and more valuable in these changing times. Consumers should make sure they understand the mortgage market before taking the plunge. Looking out first and foremost for our clients, we always endeavor to get you the best rates and best terms for your mortgage. Now more than ever it is clear that you should get some sound, unbiased mortgage advice.