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Which is Better: CMHC or Private Mortgage Insurance?

10 March, 2012 / by Bryan Jaskolka

At the beginning of February CMHC announced that they were getting near their mortgage insurance cap of $600 billion dollars. This sent up some semi-panic, and speculation about whether or not the government would raise that cap. But now some, such as the C.D. Howe Institute, and the Macdonald-Laurier Institute are asking whether or not CMHC is necessary at all.

When a homebuyer buys CMHC insurance for their Ottawa, Vancouver or Toronto mortgage, it can come at a cost of up to 2.9% of the total loan amount; and if the homebuyer is self-employed, those costs are even higher. That translates into thousands of dollars being paid by the homeowner, on top of their mortgage. Meanwhile, CMHC is turning over profits of $14 billion a year, as they reported to the federal government this year. And with CMHC being a government-funded agency, isn’t the government really just taking the homebuyer’s money to pay themselves? The cost, says the Macdonald-Laurier Institute, is simply too high to Canadians.

The problem of course, is that mortgage insurance is a life-saver to many homebuyers that in reality, can afford a mortgage, it just doesn’t translate well onto paper. And the Howe Institute also sees the problem. Their suggestion is not to do away with mortgage insurance completely but rather, to do away with government-funded insurance and move to private mortgage insurance. This, they say, could not only save consumers thousands of dollars, but it would also lighten the burden of Canadian taxpayers. Because the government’s money is really our money and when they put it at risk by insuring risky mortgages, it’s the general public that suffers. Private mortgages, says the Howe Institute, would solve that problem.

This isn’t the first time CMHC has come under fire this year. Back in early January, the International Money Fund also called CMHC into question, saying that they were taking on far too much mortgage insurance and also suggesting that private mortgage insurance play a bigger part of the Canadian mortgage picture. That report compared Canada’s mortgage insurance system to that of Australia’s. The two were very similar until 1997 when Australia moved mostly to private insurance, and became much more profitable.

At the time of the International Monetary Fund’s report, it was suggested that further reviews of CMHC be taken. Now, it looks like that’s something that’s going to have to happen.