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Friday, July 22nd, 2016

CMHC Updates- Best Mortgage Rates in BC

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CMHC Updates

The largest mortgage insurer inCanada, Canada Mortgage and Housing Corporation (CMHC) is nearing it’s limit on how much mortgage default insurance its allowed to underwrite. Of its $600 billion capacity allocated to it by the government, only $24 billion remains.

Mortgage default insurance protects the lending party in the event that a homeowner defaults on his or her mortgage. With the high cost of homes nowadays, even those with access to the best mortgage rates in BC can have trouble making payments.

Such insurance is required by most mortgage lenders in any situation where the borrower makes a down payment less than 20% of the total loan.

The above-mentioned mortgages with a down payment smaller than 20% are known as high ratio mortgages. As noted above, high ratio mortgages require mortgage default insurance. Many Vancouver home mortgages fall into the above mentioned category.

Every year, the insurance in force for CMHC seems to budge forward another percentage point or 2, but this can’t continue indefinitely.

The attention given to CMHC’s default insurance limit is mostly due to the government’s unwillingness to change the previously decided upon $600 billion limit.

The result? CMHC is forced to refocus its energy on less profitable business segments including “bulk” insurance. Bulk insurance is used by lenders to securitize mortgages; this helps them reduce their costs related to funding, manage their risk, maintain competitive interest rates, and deal with requirements related to capital.

Note that the average homebuyer need not worry about such issues. A trusted mortgage broker in Vancouver can take care of all the details for them.

Securitizing mortgages is essentially packaging up lent mortgages into investments and selling them to individuals interested in parking their money where the risk is low. Securitization creates “Canadian mortgage bonds”. The risk on these securities is low because they are backed by a government guarantee.

According to CMHC, the new rules related to mortgages released on July 9 will, “reduce the high ratio homeowner purchase market” and “effectively eliminate the high-ratio refinance market.”

Most mortgages involving high ratio loans result from the first time buyer segment.

Some other items to note:

CMHC began rationing bulk insurance near the beginning of 2012; over the first 6 months of 2012, bulk insurance fell by 40%. Per CMHC, mortgages are expected to fall off its books to the tune of $60 or $65 billion each year, on an ongoing basis. The loan-to-value ratio is 80% or less on 76% of the company’s insured mortgages (these statistics include many Vancouver home mortgages). 25 years is the average amortization period as of origination for mortgages insured.

Without adequate insurance, lenders would not be able to offer low mortgage rates. CMHC was originally founded to increase the affordability, quality and choice of housing in Canada, as well as to ensure that reasonable financing options exist for the first time buyer as well as for other Canadians lacking sound financial ground.

 

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