CMHC eases down payment rules for properties
Move risks overheating already hot housing market
You have to wonder what David Dodge will be thinking this time. Just over a year ago, the Bank of Canada governor met with Canada Mortgage and Housing Corp. because of his fears exotic mortgages were juicing an already robust Canadian housing market. Now CMHC has decided it is going to let Canadians buy investment properties with no down payment.
The Crown corporation, which controls about 70% of the mortgage insurance market in Canada, has quietly introduced changes that lower the down-payment threshold for an investment property. Instead of needing 15% down, Canadians will be able to buy a second property -- not to mention a third and fourth and fifth -- with no money down.
"These enhancements will ensure continued supply of affordable rental accommodations across Canada," said Pierre Serre, vice-president of insurance products with CMHC.
Critics charge CMHC once again has moved into risky territory, the last time being its decision to allow Canadians no money down on a principle residence. "Look at the fee, anytime it's that high, you know there is a lot of risk," said one senior mortgage industry observer.
The mortgage insurance fee for the new product is 7.25% of the total amount of the loan. So a $300,000 mortgage would have a $21,750 mortgage insurance fee.
Instead of paying the fee up front, CMHC will allow that fee to be added to the overall mortgage which can be amortized over as many as 40 years. Based on 5.8% interest, the current discounted rate for a five-year term, it would cost just over $1,700 a month to carry that $321,750 mortgage.
By law, any consumer with less than a 20% downpayment must buy mortgage insurance if they are borrowing money from a financial institution covered under the Bank Act.
None of CMHC's competitors are coming close to this new offer. Genworth Financial Canada -- the other dominate player with about 30% of the mortgage insurance market -- requires investors to have at least 10% down.
Back in July, 2006, Mr. Dodge demanded a meeting with the federal crown corporation. He was concerned about products like interest-only mortgages which give consumers the option of not making a principle payment for the first 10 years of a mortgage.
Mr. Serre said CMHC did consider the issue of whether the changes could overstimulate the market. "We look at those kind of considerations all the time," he said, adding that to get a loan consumers will have to meet certain criteria in terms of their overall debt load. "We're not trying to get people into situations they can't manage."
Some question whether there was any need for the latest change, given how strong the market in Canada remains.
The Building Industry and Land Development Association said this week condo sales in Toronto - the largest market for new high rises in North America -- were up 31% over the first nine months of the year from a year earlier.
"I'm not sure why CMHC is relaxing the rules, the logic escapes me," said Stephen Dupuis, chief executive of BILD. "The market is strong. I look at what is happening in the United States and wonder if there is a need to be so free with credit."
The real reason for the new program, suggest some commentators, is CMHC trying to fend off competitors in the marketplace. In a constant battle with Genworth, CMHC is also facing up to four new mortgage insurers who have applied to do business in Canada or are already licenced to do so.
"There are competitors in the marketplace that didn't exist before. They are reacting to competition that hasn't even materialized yet," said Mr. Dupuis. CIBC World Markets senior economist Benjamin Tal said the latest changes by CMHC are probably just the beginning. "The genie is out of the bottle, this mortgage market is starting to move. Over the past 16 months we've seen more changes than the past 30 years," said Mr. Tal. Garry Marr, Financial Post
Published: Wednesday, October 24, 2007
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