Feds' mortgage insurance rule change showing unintended consequences

June 12th, 2017  |  Home

The federal government is once again finding out that most big ideas often work better on paper than in practice.

Last year it tried to limit government exposure to high-value property by restricting access to insurance for low-ratio mortgages. Under the new rules, borrowers seeking insurance would need to have an amortization period of 25 years or less and a purchase price of less than $1-million. Given that insurance was already required of high-ratio mortgages whose down payment is less than 20 per cent of the purchase price, this move figured to minimize risk on both ends of the housing price spectrum.

Except it hasn't quite done that.

What it has done is mostly eliminate one type undesirable behaviour while inadvertently fueling another. New high-ratio mortgages have been almost completely stamped out. But now, more and more Canadians who would ordinarily fit the high-ratio mortgage profile are taking advantage of a loophole that allows them to evade the government safeguards: putting down a larger down payment on more expensive homes and bypassing mortgage insurance altogether.

According to the Bank of Canada, 46 per cent of Canada's mortgage market is now represented by uninsured loans. In the nation's hottest and most expensive housing markets, Toronto and Vancouver, over 80 per cent of new mortgages issued by the Big Six Banks are low-ratio and don't require insurance.

This is problematic for the country on a couple of levels. Firstly, it means that people will be taking out more money than they can perhaps afford in order to finance these lofty down payments. Overextended debt is never a good thing and only ends up hurting Canada's financial situation in the long run. Secondly, lenders are more exposed, because borrowers who really should have mortgage insurance aren't getting it.

If this trend continues, the government may need to revisit its mortgage insurance policies. There's no shame in returning to the drawing board if the alternative is a housing crash.