Canadian Government

Risk fee not Risk free

Published On November 29, 2013 | By Joseph (Ken) | Debt, Economy, Government

housing

In the news today is evidence of Jim Flaherty’s latest mortgage intervention in Canada. 

Ottawa to introduce ‘risk fee’ on CMHC insurance

“By law, Canadian mortgages that have less than a 20% downpayment must be insured.  

“Canada will impose a “risk fee” starting Jan. 1 on mortgage insurance provided by the country’s housing agency to compensate taxpayers for potential losses in the housing market.”

“The fee is the latest attempt by Finance Minister Jim Flaherty to rein in the agency amid concerns the nation’s housing market may be overvalued. The government-owned agency insures mortgages against default, and its insurance is fully backed by the federal government.”

If it is government-owned, how is charging it a “risk fee” compensating taxpayers?!?  It’s all still taxpayer money. The answer is given later in the article.

“They’re trying to tighten the interest-rate environment in one very targeted segment of the economy.”

This is the core reason for the fee.  

The last time Jim Flaherty intervened was on March 21, 2013 in Jim Flaherty mortgage intervention and Canadian debt

“Jim Flaherty is left with trying to juggle keeping the Bank of Canada prime rate low to keep existing debt manageable for Canadian households (to give them time to pay it down) but at the same time he can’t let interest rates go lower or Canadians households might increase their debt burden instead of paying it down.”

In this case, he’s targeting the housing market.  

Everyone keeps talking up the Canadian housing market – that there will only be a “soft” landing and not a “hard” landing when the housing market corrects.  Therefore, the goal by increasing the cost of CMHC insurance is to dissuade some individuals from taking on higher risk mortgages (those mortgage with less than 20% down).  

The concern is that people with less “skin in the game” will be less likely to weather a correction, even a soft one.   

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About The Author

Joseph (Ken)
(Ken) is a Registered Public Accountant with over 25 years of public practice experience in the accounting profession. Ken specializes in accounting information systems, taxation and financial reporting.

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