With the 2024 federal budget scheduled for mid-April, all eyes are on whether it will robustly engage the housing and greater affordability crises despite a tightening fiscal environment. 

While the arrival of Sean Fraser as minister of housing has brought a new degree of vigour and a more effective policy narrative to the issue, the recent raft of housing accelerator fund announcements alone will not be enough to quell the crisis nor alter the political fortunes of the government.  

Advancing new policies to address the current affordability pressures faced by many Canadians – housing costs being the first among many – has become a political imperative for the current Liberal government.  

The recent cancellation of the first-time home buyers incentive (FTHBI) is perhaps a telling indicator of what needs to change in the federal approach to housing policy – an intentional movement away from niche policies toward bold structural changes.   

The FTHBI was designed with good and timely intent – to lower monthly mortgage payments for new homeowners without increasing their downpayment costs by providing shared-equity mortgages for qualifying buyers directly from the federal government. 

However, the program underperformed in its first five years, disbursing only $408.92 million of its $1.25-billion budget to 22,826 households, well below its target of 100,000 households. In other words, the niche policy failed to serve its niche population.  

Looking beyond niche solutions 

In contrast, two structural policy changes could have efficiently achieved the desired end of lower mortgage premiums with greater success – 30-year amortization periods and the reduction of mortgage insurance premiums. They remain relevant and potent policy solutions.   

Extending mortgage amortization periods to 30 years from 25 for insured mortgages has previously been floated by politicians, policy experts and mortgage industry advocates. 

It would bring insured mortgages in line with uninsured mortgages, allowing lower-capitalized, first-time homebuyers to enjoy the financial benefit of smaller monthly mortgage payments. 

The exact amount of the savings is difficult to calculate because it depends on various factors such as the total value of the home, the percentage of the downpayment, the interest rate, the length of the mortgage, etc. 

However, using the average price of a Canadian home and today’s interest rates, the buyer would save roughly $300 per month or $3,600 per year in mortgage costs.  

But there are even more structural policy opportunities in the mortgage space that ought to be pursued – namely, the promised reduction in mortgage loan insurance premiums and greater competition in the mortgage insurance market.  

The 2021 Liberal election platform committed to “reduce the price charged by the Canadian Mortgage and Housing Corporation on mortgage insurance by 25 per cent.” It is time to make good on this commitment.  

Mortgage loan insurance, commonly referred to as CMHC insurance, protects the lender against defaults and is required on all mortgages with downpayments of less than 20 per cent. Lenders pass the cost of this insurance to homebuyers, with the premiums being lumped into the total cost of the mortgage.  

Typically, a smaller down payment will translate into higher premiums, given that the premiums are determined based on the loan-to-value ratio of the mortgage.  

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A buyer putting the minimum required down payment on the average home in January – estimated at $659,395 by the Canadian Real Estate Association – could expect to have roughly $25,000 in premiums added over the total length of the mortgage.  

Fulfilling the 2021 promise to reduce CMHC premiums by 25 per cent would be a welcome structural policy change that could benefit all first-time homebuyers, no matter their income levels. 

For example, the savings from a 25-per-cent reduction in CMHC premiums on the average home (as of January 2024) with the minimum required downpayment would be $6,250 (25 per cent of $25,000) over the lifetime of the mortgage. 

Creating a more competitive mortgage insurance market  

But it would be wise for the government to go even further and commit to exploring even larger structural changes to the mortgage insurance market – namely, greater competition to drive down all mortgage default insurance premiums. 

The federal government’s ability to largely dictate the cost of premiums is due to the structure and regulation of the Canadian mortgage insurance market which gives preferential treatment to the CMHC, supporting its market share of roughly 35 per cent.  

Under current regulations, the federal government guarantees 100 per cent of the CMHC’s obligations to lenders for insured mortgages, whereas private insurers such as Sagen and Canada Guaranty are prescribed a 90-per-cent guarantee. In essence, this positions the government as the ultimate backstop to debt obligations in the mortgage insurance market.  

Because of this guarantee disparity, private insurers are required (under the National Housing Act and the Protection of Residential Mortgage or Hypothecary Insurance Act) to pay into a guarantee fund, which is the functional equivalent of a reinsurance premium. This creates additional capital costs for private insurers and reduces their profit margins both in real terms and relative to the CMHC.

The difference in the guarantee gives the CHMC a competitive advantage in the mortgage insurance market. 

The difference is also a structural barrier to private insurers competing in the market, constraining their ability to offer lower premiums because they already face higher capital costs. Not to mention that a 100-per-cent backed mortgage will always be more appealing to a lender. 

These affordability measures would bring broad-based relief and stability to homeownership without stoking demand in an already warped market. None of these policy tweaks would change the eligibility requirements for owning a home or reduce point-of-sale costs. Rather they would support those managing the total cost associated with homeownership. 

Single policies – whether niche or structural in orientation – will not solve the housing crisis alone. But co-ordinated broad-based policies that reduce the bottom-line cost of homeownership can help many. After all, housing affordability isn’t just about the purchase price but the total price of ownership.