Aspiring and existing home owners have had plenty to celebrate lately, with Ottawa loosening the mortgage rules to help first-time buyers enter the market. Changes include extending the maximum amortization period to 30 years and increasing the price cap for insured mortgages by $500,000 to $1.5-million.
These changes will make it easier for borrowers to get a mortgage – but there’s one group who has been left out in the cold.
Insurable borrowers, those who have made a down payment of 20 per cent or more but otherwise satisfy insured mortgage criteria – a purchase price of under $1-million and amortization of 25 years under the current rules – have been excluded from these reforms.
This is a different type of borrower than what is known as a transactionally-insured mortgage applicant, who puts down less than 20 per cent of their home purchase price and must take out mortgage default insurance. The cost of that insurance is rolled into their mortgage.
Instead, an insurable borrower’s mortgage is pooled together into a portfolio by their lender, who then takes out insurance on these loans as a group. This is referred to in the industry as bulk insurance, or portfolio insurance. The cost of the insurance is paid by the lender, and not the mortgage holder.
Lenders do this for a number of reasons. Insuring these mortgages decreases the overall risk of the loans they’re holding in their portfolio, and it also securitizes them so that they can be sold to investors. This is a form of funding for lenders, and is especially crucial for smaller ones that don’t have as much capital as the big banks.
Unlike the Big Six financial institutions, which offer a diverse array of products and have multiple revenue streams, some smaller lenders exclusively offer mortgages. As well, many of Canada’s smaller lenders only work with insured mortgage clients. By opting to take out their own insurance on these mortgages, these lenders get access to a larger customer base, with the ability to work with borrowers who would otherwise be considered uninsured with lower loan-to-value (LTV) mortgages.
The benefit to the client is lower interest rates, as insured borrowers usually get the most competitive mortgage market pricing because of the lower risk they pose to lenders.
However, in their most recent communication to lenders, the Canada Mortgage and Housing Corporation said that these portfolio-insured borrowers would not have access to mortgages at the new maximum purchase price and the 30-year amortization length.
“[These] changes are only applicable to high-ratio loans (greater than 80 per cent LTV). The maximum purchase price/lending value and amortization period for portfolio insurance will remain less than $1,000,000 and 25 years, respectively,” the CMHC document stated.
This is a problem for a number of reasons. First, it limits borrowers who want to make larger down payments to the old 25-year amortization limit and $1-million price cap. If they want to avoid these restrictions, they’ll need to take out a conventional, uninsured mortgage, but then will likely have to pay a higher mortgage rate as a result.
This exclusion will also affect the amount of choice consumers have. By overlooking how smaller lenders – who tend to offer the lowest mortgage rates on the market – fund their loans, it makes it harder for them to compete with Canada’s banking giants. That means borrowers who are shopping around have fewer options when looking for the best rates.
However, one area where insurable borrowers will benefit from new mortgage policies is at renewal time.
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, announced in September that it would remove the stress test for uninsured borrowers switching lenders at renewal, a benefit previously available only to those with an insured mortgage.
In an e-mailed statement to The Globe on Thursday, the Department of Finance confirmed that insurable borrowers will be included in this change.
Considering these portfolio-insured borrowers are overall low-risk clients, leaving them out of these recent reforms seems nonsensical and anti-competitive – and comes at a cost that will be ultimately shouldered by Canada’s home buyers.
Penelope Graham is the director of content at Ratehub.ca.
