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As the danger of Canadians’ debt grows, the CMHC has announced that higher down payments could be required for the average homebuyer, in the near future.
Although a change is not yet on the table, the idea of raising the downpayment with loans backed by federal mortgage insurance is being discussed by the heads of Canada Mortgage and Housing Corp.
“Politicians are tempted to help first-time homebuyers enter the market, but low down payments may be part of the problem adding to affordability pressures and macro-economic vulnerabilities,” warns Siddall, in the speech which was posted to the website of the Crown corporation.
“The conditions that we now observe in Canada concern us. Increased household borrowing could be jeopardizing our economic future.”
In 1998 the Canadian government reduced the minimum down payment from 10 per cent to five per cent for first-time home buyers, as a measure to boost the economy.
The homeownership rate in Canada; 69%, is among the highest in the world.
Siddall also told the audience about CMHC’s plan to reduce the government’s risk by forcing private institutions into taking a deductible on any bad loans.
“Currently, lenders benefit from a zero risk weighting on guaranteed mortgages. Requiring lenders to have more skin in the game will align interests, reduce moral hazard and allow the system to benefit from enhanced lender risk management,” he said.
Two approaches are being considered. The first makes lenders responsible for losses up to a fixed amount of the outstanding balance on the loan, with insurers taking on all losses in excess of this limit. Another model would see lenders incur a fixed percentage of the total loss on a loan under a proportionate loss model. The moves could raise mortgage rates on a five year fixed product from 10 to 40 basis points.