All info was gleaned from CMHC's latest quarterly report ending September 30, 2016 and unless otherwise stated covers new loans originated during the first nine months of last year. Prices in the GTA have climbed to record highs since September, but despite a lag the data is still relevant in March, 2017.
From the above, you can see that the borrower is taking on a high ratio mortgage with a loan-to-value of about 92 per cent. The borrower's credit score is solid and the Gross Debt Service (GDS) ratio makes the borrower a low risk. GDS is often calculated as Principal + Interest + Taxes + Heat + half of Condo Fees / Gross Annual Income. CMHC typically will not insure loans if the borrower's GDS is above 35.
A more detailed review of the data from CMHC is shown below.
Mortgage Insurance Industry Overview
All high ratio mortgages where the downpayment is less than 20 per cent of the purchase price must be insured by CMHC or one of its private sector competitors such as Genworth MI Canada. The premiums protect the lender but are paid directly by the borrower. Some lenders may insist that even low ratio purchases be insured, as can be the case with seasonal properties or second homes.
To qualify for mortgage insurance, the purchase price of the property must be less than $1 million, the purchaser's Beacon credit score must equal or exceed 680, the mortgage amortization period will not exceed 25 years and the debt service levels must be in line with the lender's guidelines using a stress test interest rate (4.64% for 5-year fixed at the time of writing). As a rule of thumb, insurance premiums for CMHC and Genworth are similar, but Genworth may be a more viable option for purchasers who can't meet CMHC's tougher debt servicing criteria, are self-employed or are looking to buy a second home or multi-unit residential property.
While market share numbers vary over time, about one of every two insured mortgages in Canada is insured by CMHC, and as a result is fully backed by the Government of Canada. So CMHC is the biggest industry player. Genworth and other private sector players account for the remainder of the market. Mortgages insured by private sector insurers are also backed by the federal government, subject to a 10 per cent deductible, according to The Globe and Mail.
In its last reported quarter (ending Sept, 2016), CMHC reported net income exceeding $300 million and a miniscule arrears rate of 0.32 per cent. CMHC regularly runs stress tests of its portfolio vs. extremes in interest rate or loan default scenarios and passes unscathed. Similarly, Genworth's recent financial results read very well too: "On a full year basis, the Company reported net income of $417 million."
It's worthwhile noting that CMHC and Genworth Canada have both recently raised mortgage insurance premiums. The CMHC premium increases will result in an additional cost of about $5 per month for borrowers.
Source: Mortgage Loan Insurance Business Supplement, Third Quarter, September 2016
Source: CMHC's 3rd Quarter Financial Report (2016) Media Briefing - November 29, 2016
Source: Financial Post: CMHC goes from insuring 90% of new mortgages to only 50% — and that’s as low as it plans to go
Susan Williams is a Mortgage Development Manager with National Bank of Canada.
Email: susan.williams@nbc.ca Twitter: @YMJourney
