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Should the $1-Million Limit Be Increased for Insured Mortgages?

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The home price threshold to qualify for an insured mortgage in Canada is capped at $1 million, but seeing that doesn’t go very far in big city markets like Vancouver and Toronto, is it time to increase that cut-off?

“I do think it’s worth considering increasing that threshold so that you can make insured mortgages more available at what is now not a very high-value price point, but rather a mid-value price point,” said Jason Henneberry, Director of Strategic Initiatives at Tango Financial and President of Fundible.ca. “A decent quality family home in any major market is over $1 million, and those are the people who need high-ratio financing.”

Henneberry added that when the cut-off was raised to $1 million a few years ago, nobody had anticipated today’s “hyper-inflationary values.”

Read: Toronto Real Estate Had Its Biggest Year on Record in 2021

Chartered banks, which are the only lenders that can originate insured mortgages, issued 493,000 mortgages worth $167.7 billion in the second quarter of last year, according to a Canada Mortgage and Housing Corporation report, 75% of which were uninsured. In fact, in Q1 2021, 35% of outstanding residential mortgages were insured—a precipitous decline from nine years earlier when over 60% of chartered banks’ originations had down payments below 20%.

Compared to the prior-year period, the volume of uninsured mortgages in Q2-2021 grew by 20%, while the value rose by 53%.

“The policy CMHC put in place to reduce the exposure and public liability worked,” Henneberry said. “Now only 25% at the bank level qualify for insurance and that number will only continue to drop, so there’s way less risk in the mortgage market. Those companies have way less risk in their portfolios and average property values have doubled. The overall risk to the insurers has been cut in half over the period, so can insurers afford to take on incremental risk of home price increases? The answer is probably yes, and they probably should.”

How Would a Higher Threshold Impact Home Prices?

During the recent federal election, every party had comprehensive housing policy platforms with solutions, however specious, to the country’s affordability crisis. The Liberals proposed increasing federal mortgage insurance through CMHC to $1.25 million, and while the party’s been quiet on that front since securing reelection, stranger things have happened than a campaign pledge being honoured.

However, critics noted that most of the parties’ solutions would accelerate demand while doing nary a thing to rectify supply-side problems. Moreover, the founder of Toronto-based Butler Mortgage says increasing the insurable mortgage amount would inflame runaway housing prices.

“CMHC is a credit enhancement facility that makes purchasing a home easier,” Ron Butler said. “Our system is correctly built; there’s never been failure of mortgage insurance. If someone defaults, the lender still gets paid and, as a crown corporation, CMHC has always made money for Canada. But any expansion of credit facilities in a housing market like this, where there’s extremely scant supply and significant demand, increases prices. Why would we do anything that further increases prices?”

In Vancouver and Toronto, home to Canada’s two most expensive real estate markets—and where, even with a 25% increase to the insurable mortgage amount, single-family homes would still be financially prohibitive—enhanced credit facilities would have a particularly detrimental effect on affordability, Butler says. 

“It’s a credit enhancer that will open up the market to a new group of people who were either saving or waiting, so demand will rise and prices will rise, he said. “Ultimately, we have to ask a more intelligent question: if we increase the cap to $1.25 million knowing that prices will rise, is it our belief that we should have infinite price increases in Canada, particularly in the two super-heated markets, when a 1,900-square-foot townhouse in north Ajax sells for over $1 million? Do we want that house to become $1.4 million? Because that’s what we’re saying—with credit enhancement, more people will want to buy that product.”

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