The Federal Government recently made two significant changes to the mortgage rules. In the fall of 2008 the Feds did away with 40 year amortization as well as 100% financing. More recently they reduced refinancing to a maximum of 90% of the value of the property as well as change the amount of down payment required to buy an investment property from 5% to 20%.
While these changes may appear prudent, there is no proof that it is benefiting Canada and reducing the risk to the Canadian economy. For the most part the programs that were eliminated were CMHC insured programs. A person applying for one of the above programs must have an excellent credit profile to qualify for these types of mortgages and pay a higher insurance premium to offset the additional risk to CMHC. Not everyone could have qualified for those programs!
When the insurance was placed on these mortgages, the people buying a home with zero down paid a substantially higher insurance premium than a person putting 5% down (all this because the person did not put 5% down). There was no statistic showing that the 100% program was a poor program. If you were to add up all the premiums from people buying a home with no down payment, the premiums would be substantial and enough to cover this additional 5% risk. For example, let’s assume the average price of a home for these people is $200,000 with a CMHC premium of 3.70%, the borrower would have paid $7,400 in insurance. So if 100 people purchased a home for $200k then they would have generated $740,000 in insurance premiums.
Assuming that 3% of these people defaulted on their mortgage, the cost to collect this money on average is approximately $35,000 per default including, legal fees, real estate commission etc. The losses would be roughly $105,000. The reserve would still be almost $635,000 after deducting this cost. This means that the default had to be over 13% to wipe out the insurance fees collected. This is of course does not factor in the extra taxes charged by the Federal and Provincial governments on the services surrounding the sale of Real Estate. All of which generates jobs for the general public and additional revenue for the Government.
The reason I am going into such detail is that we have not seen any statistics to prove why they are making these changes other than fear mongering. I know I might be biased as I am a Real Estate and Mortgage Broker; however I believe that we should know these answers before making such drastic changes which may not help the situation but may hurt it in the long term. Do our elected Politicians really understand this or are they just reacting. Remember folks our banking system is the best in the world so why fix something that is not broken? The only problems our Banks faced during the recent financial crisis was dealing with the bad loans they bought from the US. These are the same loans that they would not do here in Canada.
For the Record, in Canada we did not have a mortgage crisis and our Banks never did lend money to unqualified buyers. The Politicians need to understand this and to stop trying to fix a problem that is simply not there.