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CMHC Insurance introduction
CMHC insurance is helping to stabilize Canada’s economic system as well as sustain the financial health of families during the COVID-19 pandemic. Effective July 1, 2020, CMHC insurance rules are changing. It will affect the cost of real estate in Canada. It is also designed to minimize risks to CMHC and therefore the Canadian economy.
I describe what those changes are and why they are being made in this Brandon’s Blog.
What is CMHC Insurance?
In simple terms, CMHC insurance is insurance provided to mortgage lenders to protect them in case of mortgage defaults. If the lender needs to sell the home and suffers a loss, CMHC insurance pays off the lender to cover that loss.
CMHC insurance allows lenders to continue making mortgage loans at reasonable interest rates to those people who would not otherwise qualify. At the present time, the down payment required to get CMHC insurance is only 5 percent of the purchase price. One of the changes that I describe below, is that it will rise to 10 percent.
How Much Is CMHC Insurance
Like any other insurance product, there are CMHC insurance premiums. The mortgage lender pays the insurance costs. It is determined by taking into account the size of your mortgage and the amount of your down payment. The lending institution passes this cost on to the borrower. It can be paid as a lump sum or included in the mortgage which obviously affects the mortgage payments.
Here is a link to the CMHC insurance page where you can use the CMHC insurance premium calculator. This will allow you to calculate your potential mortgage insurance premium rates.
CMHC And The COVID-19 Pandemic Response
Early on, in coordinated action with the Bank of Canada and with Finance, CMHC relaunched a program to make certain that financial institutions have access to term financing. The reason is so mortgage lenders can have the necessary liquidity to continue to offer mortgage financing. This ensures that the mortgage market and therefore the real estate markets remain functional.
Under the program, the Canadian government can buy up to $150 billion of insured home mortgages. They are also prepared to increase the issuance of traditional securitization programs, as needed.
On top of that, CMHC acted quickly to assist Canadians who are having difficulty paying their home mortgage as a result of the coronavirus pandemic. Acting with Genworth Financial Canada and Canada Guaranty, CMHC is using short-term deferral of mortgage payments for up to 6 months to help Canadian homeowners. CMHC believes that about 12 percent of homeowners have elected to postpone repayments until now. This number may in fact grow depending on what happens with job recalls and government support programs this Fall.
The same mortgage deferral is offered to multi-unit real estate owners in order to accommodate the loss of rental income. As well CMHC has taken actions to guarantee that charitable, as well as co-operative housing service providers, remain able to get government rent subsidies. CMHC is urging recipients of federal assistance to refrain from evictions during the COVID-19 pandemic.
Almost everything CMHC insurance has done in response to the COVID-19 situation talks about allowing Canadians to borrow. The federal government is taking on more financial debt to fund COVID-19 support programs. Mortgage deferments are adding to already historically high household debt.
CMHC Insurance guidelines
Canadians are amongst the global leaders in household financial debt. Pre-COVID-19, the proportion of gross financial debt to GDP for Canada went to 99 percent. This is due to not only more borrowing, but also declining GDP. CMHC estimates that it could go to over 115 percent in Q2 2020 and get to 130 percent in Q3, before decreasing. At those levels, GDP growth is choked off.
CMHC is now forecasting a decline in average real estate prices between 9 to 18 percent in the coming 12 months. The resulting mix of greater mortgage debt, declining home prices as well as increased unemployment is the reason CMHC takes issue for Canada’s longer-term financial security.
CMHC is trying to figure out how to handle expanding mortgage debt “deferral high cliff” that looms in the autumn when some jobless people will need to start paying their home mortgages once more. As long as one-fifth of all home mortgages could be delinquent if Canada’s economic situation has not adequately recuperated.
CMHC insurance feels a responsibility to prevent enhanced losses that arise from dropping real estate prices. CMHC believes that if it does not act, a first-time buyer looking to buy a $600,000 house with a 5 percent down payment stands to lose over $90,000 of value on their $30,000 financial investment if rates fall by 10 percent. In contrast, a 10 percent down payment provides more of a cushion.
CMHC insurance will be expected to cover losses if properties need to be sold. For these reasons, CMHC is evaluating whether it needs to alter its underwriting because of its assessment of future market conditions.
CMHC Insurance rules are changing
CMHC says that its support for homeownership cannot be endless. Canadians believe that owning a home is crucial for retirement savings. Over the past 20 years, the typical Canadian homeowner has had a tax-free gain of $340,000 from their house. CMHC believes that house prices and the resulting mortgage debt levels are significantly unreachable for first-time buyers.
Effective July 1, 2020, CMHC insurance is changing its insurance underwriting for all new applications. The changes are:
- limiting the Gross/Total Debt Servicing (GDS/TDS) proportions. The test will allow for 35% of gross income to be spent on housing. It will also only allow total borrowing costs to be 42% of gross income.
- requiring a credit rating a minimum of 680 for at least one borrower; and
- non-traditional sources for a down payment that is from borrowed funds will no longer be counted as equity for insurance purposes.
CMHC has also taken another action to further handle the risk to the CMHC insurance business, as well as inevitably Canadian taxpayers. During this uncertain time, CMHC has put on hold mortgage insurance coverage for refinancing, unless the funds are used for repair work or reinvestment in the real estate. While making this decision on multi-unit properties requiring CMCH insurance, they have not yet figured out what is going to happen when these mortgages cannot be renewed without CMHC insurance.
CMHC insurance says that COVID-19 has subjected enduring vulnerabilities in Canadian financial markets. It believes that its actions will safeguard home purchasers, minimize government and taxpayer risk as well as sustain the stability of real estate markets.
These new requirements will certainly curtail demand amongst the general Canadian population. The new CMHC insurance rules will also lower the number of people qualifying. One thing CMHC barely mentions, other than for language about saving Canadian taxpayers from losses, is that it will slow down the growth in the portfolio of CMHC insurance provided mortgages. This is what it really is all about.
CMHC Insurance rules summary
I hope you have found the CMHC insurance Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.
We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.
Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.
Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.
If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.
The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.
The Ira Smith Trustee Team wishes all of our Canadian readers a healthy, happy and safe Canada Day.
