The latest move to hike mortgage insurance premiums in Canada is a credit positive for the Canadian banks, says Moody’s Investors Service in a new report.
On Feb. 28, the Canada Mortgage and Housing (CMHC) announced that it will be increasing the premiums it charges for mortgage insurance for mortgages with loan-to-value (LTV) ratios of more than 80%, effective May 1. Moody’s says that this move is credit positive for the banks “because it, along with previous macro-prudential actions, will act as a brake on home price appreciation and mortgage lending, thereby reducing the risk of a sharp housing price correction that would increase credit losses at Canadian banks.”
Indeed, the rating agency notes that the government has made a series of changes to the rules for government-backed mortgage insurance over the past few years, including reducing maximum amortization periods (to 25 years from 40 years) and increasing minimum down payments. CMHC has also reduced the maximum refinancing amount to prevent borrowers from using mortgage insurance to withdraw equity from their homes.
While this latest premium hike isn’t large — CMHC estimates that it would only increase the monthly mortgage payment of the average CMHC-insured borrower by $5 — Moody’s says that it nevertheless represents “another tightening measure aimed at encouraging a soft landing for Canadian housing prices.”
“The increase to monthly mortgage payments is small, but could affect purchaser behaviour,” the report notes.
Moody’s says that, as far as the banks are concerned, “the high level of household indebtedness that has increasingly been driven by elevated housing prices,” remains “a key threat to the stability of the Canadian banking system”. It notes that Canadian household leverage is high compared with other countries around the world, leaving Canadian consumers more exposed to economic shocks and rising interest rates. In particular, it says that high household indebtedness “poses a greater threat to non-mortgage consumer loans on the books of Canadian banks.”