Canada Mortgage and Housing Corp. is cutting the types of mortgage insurance it offers, meaning the era of tighter rules for home buyers hasn’t come to an end.
The Crown corporation said late Friday it will stop insuring mortgages on second homes, effective May 30. Anyone who has an insured mortgage will no longer be able to act as a co-borrower on another mortgage that CMHC insures. In addition, it will stop offering mortgage insurance to self-employed people who don’t have standard documents to prove their income.
CMHC said it does not expect the new rules to have a big impact on the housing market, but hinted more changes are on the way.
Mortgage insurance is mandatory in Canada for banks issuing mortgages to home buyers with down payments of less than 20 per cent, and changes can have significant effects on home sales.
Former finance minister Jim Flaherty tightened the rules that determine which mortgages are eligible for insurance on four occasions in the wake of the financial crisis. He last imposed stricter rules in July, 2012, when he capped the amortization of insured mortgages at 25 years, down from 30. That caused home sales to plunge.
His successor, Finance Minister Joe Oliver, has signalled he wants to play less of an active role in the housing market. Real estate players were hoping that meant rule changes were a thing of the past.
But back in 2012, Ottawa told CMHC it was going to have to start ensuring that its activities contribute to the stability of the country’s financial system. In other words, it should not be selling insurance products that encourage borrowers to take on too much debt and add to the risks in the housing market. CMHC began a review of its business to ensure it is abiding by the new part of its mandate, and this is the “first set of changes” to result, it said.
Drew Donaldson, a mortgage broker with Safebridge Financial Group in Toronto, said he frequently has clients who own a condo with an insured mortgage and decide to rent it out when they buy a house. Those people will no longer be able to buy that house with a mortgage that’s insured by CMHC.
Similarly, parents who have a mortgage that’s insured will no longer be able to act as a co-borrower for their children on an insured mortgage.
CMHC was created in 1946 to help returning Second World War veterans buy homes. The Crown corporation grew into one of the country’s largest financial institutions.
The federal government backstops CMHC’s business, and CMHC said Friday its review is designed to ensure that it is “reducing taxpayers’ exposure to risk.”
It said second-home insurance and its program for self-employed people who don’t have their incomes validated by third parties account for less than 3 per cent of its insurance business volumes, in terms of the numbers of mortgages it insures. “Given the limited use of these products, their discontinuation is not expected to have a material impact on the housing market,” it stated in a press release.
The Crown corporation has been offering insurance on second homes since 2005. It has been offering insurance to self-employed people without strong income validation since 2007.
CMHC noted that “self-employed Canadians can still qualify for CMHC insured financing through CMHC homeowner products with a validation of their income using traditional methods.” Those might include audited financial statements, or unaudited financial statements prepared by an independent third party.
CMHC’s two private-sector competitors, Genworth MI Canada and Canada Guaranty, already had less stringent standards than CMHC for self-employed borrowers. It is not clear if they will adopt these product changes, or any future ones that CMHC might make.