Back Matter


  • Canadian Association of Accredited Mortgage Professionals (CAAMP), 2008, Annual State of the Residential Mortgage Market in Canada (November).

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  • Freedman, Charles, 1998, “The Canadian Banking System,” Bank of Canada Technical Report No. 81 (March).

  • Gravelle, Toni, and Karen McGuinness, 2008, “An Introduction to Covered Bond Issuance,” Bank of Canada Financial System Review, pp. 33-37 (June).

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  • Harris, Richard, and Doris Ragonetti, 1998, “Where Credit is Due: Residential Mortgage Finance in Canada, 1901 to 1954,” Journal of Real Estate Finance and Economics, Vol. 16 No. 2, pp. 22338.

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  • Jones, Lawrence D., 1998, “The Evolving Canadian Housing Finance System and the Role of Government”, in Lea, Michael. J. (eds.), Secondary Mortgage Markets: International Perspective, International Union for Housing Finance, Chicago, IL, pp. 8997.

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  • Kiff, John, and Paul Mills, 2007, “Money for Nothing and Checks for Free: Recent Developments in US Subprime Mortgage Markets, International Monetary Fund Working Paper No. 07-188 (July).

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  • Klyuev, Vladimir, 2008, “Show Me the Money: Access to Finance for Small Borrowers in Canada,” International Monetary Fund Working Paper No. 08-22 (January).

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  • Pence, Karen M., 2006, “Foreclosing on Opportunity: State Laws and Mortgage Credit,” Review of Economics and Statistics, Vol. 88, No. 1, pp. 17782.

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  • Sharp, Keith P., 1986, “Mortgage Rate Insurance in Canada,” Canadian Public Policy, Vol. XII, No. 3, pp. 43237.

  • Standard & Poor’s (S&P), 2008, “Canadian Banks’ Domestiic Retail Strongholds Ease Challenging Times,” Standard & Poor’s Ratings Direct (October 16).

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  • Stanton, Richard., & Wallace, Nancy., 1998, “Mortgage Choice: What’s the Point?Real Estate Economics, Vol. 26, No. 2, pp. 173-205.

  • Styron, W. Joey, Peter Basciano, and James M. Grayson, 1995, “Mortgage Interest Rates and Points: Practical Advice for Your Clients,” Tax Notes (December 12). (

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  • Traclet, Virginie, 2006, “Structure of the Canadian Housing Market and Finance System,” in Bank for International Settlements, Housing Finance in the Global Financial Market, Committee on the Global Financial System Publications No 26 (January).

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John Kiff is a Senior Financial Sector Expert in the Monetary and Capital Markets Department of the IMF. He is grateful to Steven Ehrlich, Tim Elliot, Leslie Fallaise, Kevin Fettig, Mark McInnis, Jim Murphy, Steven Sheppard, and Jamie Wyllie for helpful comments.


Prior to 1954 banks were not even permitted to make mortgage loans, so most loans were made by individuals and insurers (Harris and Ragonetti, 1998). The 1954 Bank Act amendments allowed banks to make mortgage loans insured under the National Housing Act, and the 1967 amendments allowed them to make non-insured (“conventional”) mortgage loans. They also lifted a six percent interest rate cap on bank loans, which had kept banks out of residential mortgage lending. However, until 1992 conventional mortgages could only be held if their value was below 10 percent of bank deposits. The 1980 amendments were also important because they allowed banks to book conventional loans in mortgage loan subsidiaries that could raise deposits that were exempt from reserve requirements. Finally, the 1992 amendments evened the competitive playing field between banks and other deposit-taking institutions, and allowed banks to own trust companies. (Freedman, 1998)


CMHC is owned by and its financial obligations are a direct obligation of the Government of Canada.


NHA MBS are pass-through securities that are issued in various terms to maturity, but five-year terms have been most popular. CMBs insulate investors from prepayment risk, and pay interest coupons over the full term of the bond and the full principal on the specified maturity date. Most are fixed-rate five-year bonds, but some floating-rate and ten-year bonds have been issued. See Box 2 in Klyuev (2008) for more detail on NHA MBSs and CMBs.


The insurers are required to contribute to a guarantee fund and set aside reserves to absorb losses. The 10 percent guarantee differential recognizes the cost associated with CMHC’s mandate to serve all parts of the country, and other forms of housing such as rental housing. For example, more than one-third of CMHC’s business is in markets that private insurers do not serve, or are less active, such as homes in rural or remote locations, and nursing homes.


On a typical closed mortgage, the actual prepayment penalty depends on when it is made. If it is in the “closed period” (e.g., the first three years of a four or five year mortgage), the penalty is equal to the greater of (a) three months of interest on the prepaid amount, or (b) an interest rate differential (the contractual rate minus the current rate with the same remaining term) applied to the prepaid amount. During the “closed period” (e.g., the last two years of a five-year term), the penalty is equal to the three months of interest on the prepaid amount. To these penalties are added a “reinvestment fee” that starts at about $500 in the first year, sliding down to $300 in the third year, and zero thereafter. However, if it is a refinancing transaction with the same bank, the penalties may be lower. (These rates were taken from a Bank of Nova Scotia term sheet.)


Twenty-five-year terms had long been the norm prior to the period of rising rates that commenced in the late sixties. For example, 25-year terms were required for NHA-insured loans prior to 1969, when the minimum term was dropped to five years, to three years in 1978, one year in 1980, and then to adjustable rates in 1982. However, adjustable-rate mortgages only became eligible for NHA MBS and CMB in 2004. Bill C-66 which was passed in 1999 gave CMHC new authorities. Using these authorities CMHC created the CMB program in 2001 and began expanding the type of mortgage eligible for the program soon thereafter. Variable rate mortgages securitized through NHA MBS were introduced in 2004.


According to the CAAMP (2008) survey, 16 percent of mortgage had amortization periods longer than 25 years, but only 10 percent had terms longer than five years. Only 27 percent had adjustable rates, but that had grown to about 40 percent for 2008 originations.


The government also introduced more stringent asset and income documentation standards and consistent credit scores for new mortgages. The insurers’ extended amortization mortgage insurance surcharges are 20 basis points for amortization periods longer than 25 years up to 30 years and 40 basis points up to 35 years.


U.S. homeowners that relocate must prepay their existing mortgages and take on a new one at prevailing rates.


Comparing variable- or adjustable-rate mortgage (VRM or ARM) costs is complicated by the fact that, whereas Canadian VRMs are fairly plain vanilla, U.S. ARMs embed numerous bells and whistles, such as “teaser rates” (see Kiff and Mills, 2007).


These state and local mortgage transaction taxes would be on top of about $1,000 of land transfer taxes that would be payable on a home purchase transaction.


The Canadian costs are based on a transaction in the City of Ottawa in the Province of Ontario provided by Steven Sheppard of Ottawa’s BrazeauSeller LLP.


This offer was based on a mortgage loan to a prime borrower who is putting up a 20 percent down payment on a home in Fairfax County in the state of Virginia. Other lenders may charge more or less. For example, the Bank-Fund Staff Federal Credit Union was charging a $1,250 origination fee. See Stanton and Wallace (1998) for the economics of points. Styron, Basciano and Grayson (1995) discuss the tax aspects of upfront points (when paid on the purchase of a principal residence they are tax deductible).


However, the federal government covers the 90 percent of private insurer losses.


To qualify as a prime borrower for CMHC MI purposes, the borrower or guarantor must have a minimum credit score of 620 (it was 600 prior to October 15, 2008). If a lender wants to insure a loan with an LTV between 60 and 80 percent, the credit score must be at least 580, which is the prime threshold in the United States. No minimum credit score is required to insure loans with LTVs below 60 percent. In Canada, three firms offer credit scoring services. They are Equifax, Trans Union and Experian, and base their formulas on that developed by Fair Isaac Credit Organization (FICO).


The debt-to-income thresholds for mortgages guaranteed by Fannie Mae and Freddie Mac (i.e., “conforming” loans) are 28 and 36 percent.


In fact, until recently, it was U.S. practice to use a fixed “teaser rate” that applied to the first two or three years of many adjustable-rate mortgages (ARMs), for affordability calculations (Kiff and Mills, 2007). However, some Canadian lenders have started to qualify adjustable-rate loans on the basis of current floatingrate loan rates.


In the United States, 50 percent down payments were required until the FHA introduced loan insurance in 1934. After that, the down payment requirement quickly dropped from 25 percent to 10 percent by the late 1940s. In Canada, until 1954, 20 percent down payments were required on NHA-insured loans and but 40 percent was the norm on conventional mortgages (Harris and Ragonetti, 1998).


For example, in the early seventies, CMHC’s Assisted Home Ownership Program (AHOP) insured mortgages with LTVs greater than 95 percent.

Canadian Residential Mortgage Markets: Boring But Effective?
Author: Mr. John Kiff