I'm going to use a Boardwalk Empire analogy:
You come to Nucky Thompson and say, 'There's a truckload of Canadian Club coming from the border but I need to give them the cash up front. A truckload of whiskey costs $1000. I can sell it over a period of time for a huge profit. I only have $100. Can you spot me $900 if I pay you $1500 in installments.'
Nucky says 'Sounds good. I'm in. But I want you to pay 20% of the cost up front. Anything less than that is too risky for me.'
'I only have 10%. Can't we work something out? You can break my knees if I don't pay.'
'I don't break knees anymore, I just wear really great suits and make tons of money. Here's what I'll do: I'm going to talk to Mickey Doyle. He's going to check you out and make sure you can pay. If you don't he's going to pay me your portion (and maybe break your knees).'
'Kinda like insurance?'
'Exactly like insurance. Now leave.'
The next day Mickey calls in a his ultra-annoying high pitched voice. 'Hehehehehe... I checked you out and looked into the investment you're purchasing. I believe you're going to pay Nucky back, but my butt is still on the line if you don't. So I'm making you pay me $2 ever month just for the hassle. Wait, you're not self employed, are ya? That rate is $4.75.'
'Wow Mickey. That's a great deal. Thanks.'
'No problem. Hehehehehe... always here to help.'
In Canada it's always been easy to get whiskey. But not so easy to get a house.
When my Grandpa returned home from the Navy at the end of World War 2 he was unmarried and got to work right away on building a 20% down payment for a house. He was lucky. Many of veterans returned home to young families and had lost important years of their lives where they could have been working and saving for a down payment. The bank deemed them as too risky for a mortgage because they didn't have a enough to form a down payment. Some verterans must have tweeted their Members of Parliament, because the government recognized the need to bridge this gap and offer support.
So the Canadian Mortgage and Housing Corportation was created in 1946 to help veterans purchase homes. Likely they helped many of our grandparents buy their first home and we have no idea what a great impact that has had on our own financial situation today.
For almost all Canadians, the most insurmountable obstacle to owning a home is saving the 20% payment that mortgage lenders require. The average price of simple townhouse in Calgary has risen to $359,345. In order to save up the $71,869 for a down payment you have to be house poor for years before you even set foot in your house!
The CMHC, for a small fee included in your mortgage payment, let's a mortgage company know, 'This guy is going to pay their mortgage. If they don't, I'll cover it.'
For some reason, the rest of the world hates the CMHC for doing that. I think it's pretty awesome.
In Canada we value home ownership.
Home ownership always will be a phenomenal investment. It goes up in value while you pay it off, and has real, tangible value. The majority of our time is spend in it. More of our money goes toward payments, maintenance, and upgrades then anything else. Owning our own home gives us a control of our life and finances that is a key component, I believe, to a healthy self-esteem and confidence.
Likely, you are one of the 65% of home owners in Canada who have an insured mortgage. Likely, you are building enough equity in your home that one day you won't need it anymore. But your kids will.
I like the CMHC. More than like Mickey Doyle. I wanted to compare them to Richard Harrow because he's so awesome, but then you'd imagine the CMHC is having half a face to killing everyone.
PS: There's another company called Genworth that is not government owned and also insures mortgages. They're more like Arnold Rothstein. Harder to get money from much more vicious if you don't pay up.
PPS: While mortgage loan insurance a wonderful thing. It should not to be confused with mortgage life insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate. Mortgage Life Insurance is complete crap. More on that in an upcoming blog.