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Plans to reduce LTV ratio

Mortgage insurance requirement would be raised to 80%


he federal government has released a white paper that proposes raising the ratio for mandatory mortgage insurance to 80 per cent. Currently, the insurance is required for residential mortgages exceeding 75 per cent of the property value.

The recommendations were included in a Department of Finance white paper containing recommended changes to Canada’s financial services legislation. A consultation process leading to the current review of the financial institutions statutes was launched in 2005. Finance says the proposals are aimed at achieving three key objectives: enhancing the interests of consumers, increasing legislative and regulatory efficiency, and adapting the framework to new developments.

Mandatory insurance for high loan-to-value (LTV) ratio mortgages was introduced more than 30 years ago as a prudential measure to ensure that lenders are protected against fluctuations in property values and associated defaults by borrowers. At that time, the threshold was 66.7 per cent. This was raised to the current level of 75 per cent in 1965.

The white paper says there have been a number of significant changes to the marketplace in the years since the last increase. These include improvements to the risk management practices of lenders, the implementation of regulatory risk-based capital requirement, and the fact that capital markets have changed and matured. The paper also notes that the supervisory framework for federally regulated financial institutions has been strengthened significantly.

“The restriction may therefore no longer serve the same prudential purpose,” states the white paper. “As a result, a statutory requirement for insurance set at 75 per cent LTV may mean that certain consumers are paying more for their mortgage than is justifiable on a prudential basis.”

”The Government has concluded that below 80 per cent LTV, insurance need not be required by statute and the decision could be left to the discretion of the lender,” the paper continues, noting this would be consistent with practice in other jurisdictions such as the U.S. and Australia, where most lenders do not require insurance unless the LTV ratio exceeds 80 per cent.

Finance Minister Jim Flaherty has indicated that the federal government will table legislation this fall to implement the recommendations – including the changes to Canada’s mortgage insurance requirements.

The federal government is also moving forward with a recommendation to allow new entrants into Canada’s mortgage insurance market. The House of Commons Finance Committee gave its support to a Budget measure that would open Canada’s mortgage insurance market to new entrants and double the federal government's exposure to the Canadian home mortgage market during a hearing held in late May. CMHC currently has about 70 per cent of the market while private insurer GE Financial covers the rest.

July 21, 2006 in Arranging Mortgage Financing | Permalink


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