What is High Ratio Insurance Anyway?
Last month CMHC announced they were tightening up their lending guidelines for high ratio borrowers and everyone was up in arms about the impact that would have on first time home buyers. Anyone with less than 20% down payment would require a high ratio mortgage. Meaning the more money you have to borrow (as a percentage of the home's value) the higher ratio the mortgage is. I wanted to delve in a bit deeper and explain what these changes mean and how this will affect you, as a home buyer or seller.
CMHC (Canada Mortgage and Housing Corporation) is a crown corporation that was created back in 1946 to assist with the return of Canadian soldiers returning to Canada from the war in Europe. They created social and rental housing, wartime housing and worked with the provinces to create low-rent housing developments. CMHC built the first co-operative housing in Canada, assisted in the construction of Habitat for Expo 67 in Montreal and they manage the Granville Island lands in Vancouver. They have implemented programs to repair and improve accessibility for disabled persons’ homes, they work with aboriginal groups for urgent repairs and continue to increase the rental and multi-family residential housing stock.
To buy a house back in the 1940’s a person needed 25% down payment. In 1954 CMHC introduced a mortgage loan insurance that allowed people to purchase homes with less than 25% down by paying an insurance premium. The banks followed the CMHC underwriting guidelines, the buyer paid an insurance premium, and if the home buyer defaulted on their mortgage, CMHC protected the bank by paying them back any losses incurred.
Before 1992 to purchase a home, a person needed a minimum of 10% down. CMHC piloted and eventually finalized the ability to purchase a home with 5% down payment. Fast forward to 2006 where they allowed 0% down payment. Then the pullback started. First was the removal of 0% down payment back to 5% down payment. Over the years, the price of housing has continued to rise and CMHC has developed a substantial investment in the Canadian housing market. As CMHC is a crown corporation they have a responsibility for prudent underwriting guidelines and ensuring that the housing market does not become a housing crisis. Over the years the Ministry of Finance has mandated that CMHC and their counterparts Genworth and Canada Guaranty create stricter lending guidelines. This includes the mortgage “Stress Test” which involves qualifying at a higher mortgage rate than one is actually receiving, having better credit, longer job stability and a quality home.
Fast forward to last month and CMHC made some policy changes, requiring buyers to have even better credit than before and lowering the borrowing amount for a buyer. What is interesting about this decision is that it was a CMHC decision, not a Ministry of Finance decision. This left the door open for Genworth and Canada Guaranty to NOT change their policies. As Mary Putnam, Vice President at Canada Guaranty stated, “Given the implementation of the qualifying stress test and historic default patterns, Canada Guaranty does not anticipate borrower debt service ratios at the time of origination to be a significant predictor of mortgage defaults.”
What She Said!! Defaults on mortgages are caused by an economic downturn, job loss, divorce, death in the family. Defaults are caused because life became overwhelming and unmanageable, not because of how a mortgage was originally granted. No one intends to default on their mortgage. Mortgage payments are generally the first debt people pay in times of trouble.
What does this mean for you? There are still all the same options as there were before. Banks are still lending money. High ratio insurers are still allowing 5% down payment from savings, RRSP or a non-repayable gift from parents. Keep your credit clean, keep your job steady and you can buy a home. Nothing has really changed.