As part of its efforts to address the current financial crisis, the federal government announced that it will inject $75 billion of new money1 into the financial system, by buying insured mortgage pools from Canadian financial institutions.
The purpose of this measure is to add liquidity to financial institutions – money they can then lend to businesses and consumers. The main effect of such an initiative is to increase the availability of credit while, at the same time, making the cost of credit more affordable. As a result of this plan, financial institutions' mortgage interest rates should drop, which is likely to stimulate activity on the resale market.
This announcement is good news for our financial system and for the economy in general. Ultimately, it is borrowers who will benefit from this initiative, particularly future home buyers.
This federal government intervention was made necessary by the fact that the financial crisis has led to a significant reduction in the amount of credit made available by the private sector and, as a result, higher costs. In this context, banks' financing costs increase, which translates into higher prime rates and mortgage rates.
The purchase will be made through the Canada Mortgage and Housing Corporation (CMHC) and will focus exclusively on mortgages that are already insured under its mortgage loan insurance program.
For additional information, consult the news release and backgrounder issued by the Department of Finance by clicking here.
1: Minister of Finance, Jim Flaherty, made an initial announcement of $25 billion last October 10, and announced an additional $50 billion on November 12.
