Canada Mortgage and Housing Corp. recently announced moves that critics say will drive many home buyers to the poor house, as it were, and could leave Canadian taxpayers on the hook. CMHC is offering mortgage insurance for interest-only loans and on amortizations up to 35 years, while also scrapping the typical $165 application fee on high-ratio loan products for people with less than 25-per-cent down payment. With an interest-only loan, a borrower can pay interest only for the first 10 years, then pay both interest and principal. Payments are initially low, but since the entire loan must still be paid off within the original amortization period, payments balloon as the principal starts being paid down, and again if interest rates rise. The first issue is whether a government agency like CMHC should be competing with private companies like Genworth Financial in the business of offering mortgage insurance on interest-only loans. If CMHC has to pay out a rash of defaults, the money will
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