What is mortgage loan insurance? This is a type of insurance that allows eligible borrowers to purchase a property with a down payment of as little as 5%. It also provides an additional guarantee to federally regulated financial institutions that lend money on the title of a residential property, and increases the number of Canadians who may qualify for a mortgage loan.
When a customer purchases a home with less than 20% down payment, the Government of Canada requires the mortgage to be insured against default. This type of insurance protects banks and credit institutions against default.
The latest tightening of mortgage loan insurance rules has had a definite impact on the real estate market. Across the Greater Montreal Area, said Paolo Codenas, QFFEB’s director of market analysis, sales in residential properties declined by 9% in 2013. Prices have remained relatively stable in a market that is no longer for sellers.
For 2014, Paolo Codenas still plans a slight increase of 3% in sales and a 1% increase in the median price of single-family homes. Market conditions will be broadly balanced, except for the condominium where the market will this time be slightly to the benefit of buyers.
Benefits for Canadians
Over the years, Canada’s housing finance system has benefited enormously from the simplicity and stabilizing effect of mandatory mortgage loan insurance. This insurance eliminates the risks lenders face and allows them to extend to borrowers like you a mortgage at a much lower interest rate, even if you make a down payment of the amount that would be required. other.
Compulsory mortgage loan insurance provides the financial sector with a necessary safety net and, as a result, helps to ensure access to mortgage credit during periods of recession and economic slowdown.
The economic crisis in the United States and the reasons why Canada is better protected against such a crisis
The economic crisis in the United States in 2008 has had disastrous consequences in most Western countries. The adverse effects on the economies of these countries come mainly from the poor regulation that governs the world of finance among our neighbors to the South. More specifically, it is more the laxity of the framing of financial practices related to mortgage lending that has led the US economy to the brink.
Mortgages in Canada and the United States
Unlike Canada, US banks are not legally required to apply for mortgage loan insurance for borrowers.
In addition, mortgages in Canada are generally “full recourse” loans, that is, the borrower remains liable for the receivable even in the event of foreclosure. A lender can go to court to collect money from the landlord if the foreclosed property is sold for less than the amount due under the mortgage. In many US states, loans are “non-recourse”, that is, the borrower can often abandon his property and the related mortgage debt, without the lender having any remedy. , apart from the seizure of the property. Since the amount of mortgages to be repaid exceeded the market value of the homes, the financial institutions incurred considerable financial losses.
Canada remains in a much better position than the United States in countering this type of slippage, as about 50% of Canadian mortgages are insured, while in the United States, in the years preceding the economic downturn of 2008, this rate was only 15%.
In the United States, new “exotic” mortgage products have gained popularity over the years leading to the economic downturn. These mortgages often had incentive rates that artificially kept the initial monthly payments low and raised them considerably thereafter. Such features have never been adopted by major Canadian mortgage lenders.
The phenomenon of high-risk loans
It has been less significant here than in the United States, where the vast majority of mortgage loans were made by third parties, then made into blocks and sold to investors who often did not understand the risk associated with these securities. By contrast, in Canada, most mortgages are made and held by financial institutions whose purpose is to establish a lasting relationship with the borrower. CMHC does not insure high risk mortgages.