The Sea Change in Canadian Mortgage Insurance

The Sea Change in Canadian Mortgage Insurance

Canada’s mortgage insurance market has changed significantly in the past decade, with only 35% of outstanding residential mortgages extended by chartered banks being insured. This gap has been caused by regulatory changes, soaring home prices, and changes to portfolio insurance. Uninsured mortgage volumes have ballooned as a result, while both high-ratio insured (-6.7%) and conventional insured (-14.7%) dropped in the first half of 2021, versus the same period in 2020. CMHC has data on the risk profile in Canada’s mortgage market, finding that high-ratio insured (-6.7%) and conventional insured (-14.7%) dropped in the first half of 2021, versus the same period in 2020. On average, the loan amounts for uninsured mortgages are higher than for insured mortgages, largely due to a larger share of high-value residential mortgages of over $1 million.

Uninsured LTVs are climbing, with 75% of insured mortgages being under $500,000, versus 57% for uninsured mortgages. Uninsured mortgages are being originated with higher total debt service (TDS) ratios, and the share of new uninsured mortgages with a TDS ratio of 40% or less has been on a downtrend since the second half of 2020. This suggests that there is more risk in pockets of today’s uninsured mortgage market, as home equity is an increasingly important safety net on higher-risk loans, and some uninsured lenders will be put to the test as home equity shrinks in the next housing downturn. The Liberals have proposed a number of changes to the mortgage insurance regime, including a higher insurability limit, a stricter stress test, First Time Home Buyer's Incentive enhancements, lower default-insurance premiums, new funding methods, higher capital requirements, and other regulatory changes. These changes are expected to shift the insured/uninsured balance "overnight" and raise questions about whether the policy benefits are worth all the systemic costs and how big the new latent risks are in the modern uninsured market. It will likely take a major housing downturn to reveal the answers.