Canada Mortgage and Housing Corporation
Mortgage insurance plays a significant role in the Canadian housing market. All national government-regulated financial institutions (and most financial institutions regulated by regional government) are legally required to purchase insurance for mortgages which exceed 80 per cent of the value of the dwelling being purchased.
Description
Subject to allocation limits, lenders can also purchase insurance for portfolios of previously uninsured low-ratio mortgages. The availability of mortgage insurance increases the availability of mortgages for borrowers with low down-payments who are likely to be lower earners or first-time home purchasers.
Actors involved
Canada Mortgage and Housing Corporation (CMHC)
Scale
National
More information
By far the largest provider of mortgage insurance is the Canada Mortgage and Housing Corporation (CMHC) – a national government agency operated on a commercial basis which a range of housing finance facilities. CMHC-insured mortgages have an explicit government guarantee that provides 100 per cent of lender claims in the event of a mortgage default. The costs of this insurance are funded by a premium paid upfront by the borrower when the loan is issued.[1]
Canada experienced a relatively low level of mortgage defaults and bank insolvencies following the global financial crisis in 2008. While numerous social, financial, and regulatory factors contributed to this, there is evidence the mortgage insurance system played a role. This is revealed by comparing Canada with the US, where mortgage insurance also plays a key role in the housing finance system. In the US, mortgage insurance is paid on an ongoing basis by the borrower and can be cancelled when their loan-to-value ratio falls below a specified level, whereas this option is not open to Canadian borrowers. In addition, United States mortgage insurance only covers losses which exceed the loan-to-value ratio, whereas in Canada it covers the full amount of the loan. CMHC is subject to particularly close scrutiny by government because it offers an explicit government guarantee.[2]
[1] Allan Crawford, Cesaire Meh, and Jie Zhou, “The Residential Mortgage Market in Canada: A Primer”, Bank of Canada Financial System Review (December 2013), pp. 53-63. Available at https://www.bankofcanada.ca/wp-content/uploads/2013/12/fsr-december13-crawford.pdf.
[2] John Kiff, “Canadian Residential Mortgage Markets: Boring but Effective?”, Working Paper, No. 09/130, 1 June 2009 (Washington, D.C., International Monetary Fund, 2009).
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