MORTGAGES I Interest-only loans won’t lead to economic chaos, mortgage head says
Sun
OTTAWA — The Canadian market is not about to be flooded with high-risk, cash-poor homeowners, a government official insists.
Karen Kinsley, the Canada Mortgage and Housing Corp.’s president and chief executive officer, spoke with Bank of Canada Governor David Dodge Thursday to convince him a new CMHC insurance program will not lead to economic chaos.
Dodge questioned a CMHC program earlier in the day that allows homeowners to have an interest-only mortgage insured with no down payment.
Kinsley said there’s a misconception that homeowners opting for this type of loan can qualify based on their ability to meet their monthly interest payments only. Kinsley said the CMHC program assesses a homeowners’ ability to meet both its principal and interest payments.
“This program doesn’t change the qualifying criteria,” Kinsley said. “They’ve got to be able to pay the principal and the interest.”
Dodge raised the possibility of spiralling inflation Thursday when asked about the interest-only loan insurance program. Some economists believe that supporting these loans allows homeowners into the market that would not otherwise be able to afford a home.
By spending money on homes and consumer goods rather than a down-payment, some economists suggest the surging demand in the housing market for contractors, supplies and labour will cause dangerous inflation.
“You could make an argument for [inflation],” said Fred Ketchen, director of equities trading at ScotiaMcLeod.
Ketchen said having money in the housing market that would otherwise be put to down-payments could artificially drive up consumer demand in the industry, which would drive up prices.
Kinsley said the CMHC insurance program is not the same as insurance programs offered elsewhere in the world. In some countries, homeowners can receive mortgage insurance based on their ability to make monthly interest payments. The CMHC qualifying process, Kinsley said, is more rigorous.
The CMHC is a Crown corporation that aims to make home ownership attainable to more Canadians.
In this week’s Monetary Policy update, the Bank of Canada suggested the slowdown in the U.S. housing market poses a threat to Canadian exporters. Interest-free loans are popular in the U.S., which raised similar inflation fears among U.S. Federal Reserve officials.
© The Vancouver Sun 2006