Is It Wise to Increase the Limit Of CMHC-Insured Mortgages?
The Canadian housing market is inflating. As of June 2022, the average home prices in Canada were $665,849. Thanks to the BoC rate hikes, the market is stabilizing, but still, it is quite high.
The minimum down payment is based on the purchase price of your property. If your house costs you $1 million or more, you will be required to accumulate 20% of the purchase price.
As the housing prices are swelling, the down payment that you need to make is also increasing. As of September 2021, it was promised by the Liberal government that the minimum requirement of 20% will be reduced to 8%.
It seems to be a good idea when we see it on the ground. This will give a boost to mortgage lending as lenders will immediately witness higher disbursements. Moreover, the houses will become more affordable for the average Canadian.
However, this can be harmful to the overall Canadian economy. There can be increased instances of defaults and loan disbursements to less capable candidates. This can put undue pressure on the insurance companies as well.
Let us delve deeper and understand everything in detail.
What Are the Present Limits?
The CMHC stands for Canadian Mortgage and Housing Corporation. It is a Crown corporation, which protects mortgage lenders from loan defaults.
Buying a CMHC insurance policy becomes mandatory for a buyer, who cannot accumulate 20% of the purchase price in a down payment. It covers all houses with a maximum purchase price of less than $1,000,000.
The CMHC insurance boost affordability. It allows you to buy a house:
- By making 5% in down payment for the first $500,000
and
- 10% of any additional amount
Understand the present proposition better through this table:
| Purchase Price | What is the percentage of the Minimum Down Payment? | How much down payment you will pay? |
| $500,000 | 5% | $25,000 |
| $999,999 | 7.5% | $75,000 |
| $1,000,000 | 20% | $200,000 |
What Are the Proposed Changes?
How much you will have to pay in the down payment is directly related to the housing cost. This certainly means that with an increase in the average cost of housing, your down payment is bound to move north.
Let us analyse the increasing trends in housing prices through the chart below:
One can clearly see the double-digit growth in the average housing prices. Now since the quantum of the down payment is based on the housing cost, it has also increased over time.
This has pushed the government to increase the limit of CMHC-insured mortgages. You can understand the proposed changes through the table below:
| Purchase Price | What is the percentage of the Minimum Down Payment? | How much down payment you will pay? |
| $500,000 | 5% | $25,000 |
| $1,000,000 | 7.5% | $75,000 |
| $1,249,999 | 8% | $100,000 |
| $1,250,000 | 20% | $250,000 |
What Will Happen If The Limit Is Increased?
Let us explore how it is going to unfold.
1. Increased Affordability of Homebuyers
Increasing the CMHC-insured mortgage limit could come as a breather for most small and marginal Canadian homebuyers. By paying a lesser amount in the down payment, they can now eye for a house that was previously unaffordable. It will increase their artificial spending limit.
Let us understand via an example.
Alex and Mitchell are tenants residing in a condominium located at Brampton. Through years of savings, they have accumulated $100,000, which they are willing to pay as a down payment.
As per the current rules, they can afford a house worth $1 million. However, if the new rules are implemented, they can eye for houses worth $1.25 million. Their artificial spending limit gets increased by 25%.
2. Increased Sales in the Premium Segment
If the proposed changes are implemented, the hard limit of $1 million will cease to exist. It will give a major boost to the houses that cost upward of $750,000.
This will happen because more and more people would enter this segment, which was previously unaffordable. They will qualify for bigger mortgages and would prefer to buy a better house.
Furthermore, the sales of houses that cost less than $750,000 will not be affected if this proposal is accepted. This is because it would have the least impact on the class of buyers that eye for houses pertaining to this category. There will be no change in their overall monetary status.
3. Increased Prices of Houses Between $750,000 And $1.25 Million
If the proposed changes are accepted, there will be a sudden influx of homebuyers with an increased artificial spending limit. They would want to assume bigger mortgages (as they qualify for them now) and buy houses between $750,000 and $1.25 million.
This will simply increase the demand for houses lying in this segment. And with increased demand, housing prices will further surge.
For example, a condominium worth $550,000 will not increase in value. However, a house worth $850,000 will likely rise to $1 million.
So, It Is Wise to Do It?
The Canadian housing market has been a hot cake for the past several years. The average housing prices are already witnessing double-digit growth.
Increasing the limit will improve affordability, and this will have a direct impact on housing prices. They will further increase in value. This will also worsen the already high inflation persisting in the economy.
Over time, the benefits of improved affordability will nullify due to the constant housing surge. What will happen then? – Will the government again increase the limit?
