The ‘hidden’ tax many of your clients are paying

Bill Morneau’s December announcement hiking the minimum down payment on homes over $500,000 to 10% certainly caused a stir but that won’t stop the federal government from abusing its taxation powers and residential real estate

The ‘hidden’ tax many of your clients are paying
Its official name is mortgage loan insurance but to some advisors the CMHC’s near-monopoly that protects bankers at the expense of hardworking Canadians is more akin to an additional tax from our federal government.
Any way you slice it reckons Nova Scotia advisor Glen Rankin -- it’s one giant cash grab.
“Let’s pull the curtain back on the CMHC and look at how much they’re retaining versus their exposure to mortgages and gobs of fees that they’re taking and investing compared to the defaults. If you look at what they’re collecting versus what they’re paying out I think you’d be surprised how ridiculous it is. Their war chest is huge.”
But Rankin’s not the only one who thinks the CMHC is a cash-sucking entity charging way too much in fees and generally pulling the wool over Canadians’ heads.
“The Canada Housing and Mortgage Corporation was created by our very own federal government in 1946 to help Canadians with the post war housing shortage,” wrote Toronto real estate agent Sam Soukas in a blog post in 2014 about the CMHC’s impending premium increase. “Today, CMHC provides insurance to lenders to protect them in case you default on your mortgage.”

A buyer of a $600, 000 house, Soukas reminds us, has $10,800 added to the mortgage to cover CMHC’s premium for mortgage loan insurance. While that is only 1.8% of the price of the house that really adds up over millions of mortgages. Worse still, government coffers get an additional $1,404 in HST, all so the bank is protected against the buyer defaulting.

“This premium should be getting paid by Lenders, BUT, the banks said, ‘Screw that!’ Isn’t insurance meant to protect you from unforeseen events?” wrote Soukas. “Yes, you would think so, but this insurance policy was created by the government to protect our Big Banks. This insurance policy is not for you. Banks being Banks are very profit minded AND make YOU the buyer pay this premium for them.”

All six of the big banks have profited greatly from the CMHC’s security blanket but none more so than CMHC itself.

In 2014, CMHC generated $1.7 billion in premiums and fees while it had $328 million in insurance claims for a loss ratio of less than 20%. Its provision for claims (estimate of future losses on mortgages that are in arrears but have not yet been reported as a claim by the lender and losses on claims reported but not paid) in 2014 was $778 million, less than half the total fees earned by the federal Crown corporation and one-third its cash and cash equivalents.

In the minds of many the CMHC is a charade that insulates the banks while hurting average Canadians by disguising a tax in the form of an insurance premium – and it has to end.

What do advisors think about this issue? Feel free to leave comments.