OSFI Determines No Change to Mortgage Insurance Business
October 1, 2014
In September, OSFI, the Office of the Superintendent of Financial Institutions, had confirmed that it intended to review a concept that would cost banks a deductible in the case of default for insured mortgages.
Currently, home-owners who have a down-payment of less than 20% are required to pay an insurance premium on their mortgage. This insurance serves to protect the mortgage lender from mortgage default and helps to make the lender “whole” in case of default. In cases where home-owners provide a down-payment of 20%+, banks typically pass along the cost of the mortgage by offering a slightly higher mortgage rate – usually 0.05% higher – so that the bank themselves may pay the premium required to insure that mortgage.
The idea introduced in September proposed that banks and lenders would be charged a deductible in the case of a mortgage default. Supporters of the idea point to the effect of softening the losses incurred by insurers and forcing the banks and lenders to be more careful about who they lend to. Detractors are quick to indicate that the banks would merely pass on the cost of the deductible to consumers, resulting in qualified borrowers incurring more borrowing costs.
In early October, OSFI determined that they would not be adding a deductible to banks and lenders on defaulted mortgages. Jeremy Rudin, the head of OSFI, indicated that if a change was to be implemented, “It’s something that, if there’s an interest, it would be an issue for the Minister of Finance to lead.”