In 2010, two years after the start of the credit crunch, 55% of all new Canadian mortgages were for more than 80% of the purchase price, a far higher proportion than the UK. More generally, Canada has not experienced the mortgage drought we see here. How do they do it? And should we follow suit?
I’m indebted to the Council of Mortgage Lenders for information on the Canadian mortgage market and you can see their full briefing here. So, if you want chapter and verse, you know where to find it. If you want a summary, I hope this will do.
The answer lies in large part in the Canadian attachment to Mortgage Insurance. To all intents and purposes, home buyers in Canada who want to borrow more than 80% of the purchase price have to take out compulsory Mortgage Insurance to protect the lender against default.
The insurance covers the lender for the whole of the loan (not just part of it) and it lasts for as long as the mortgage does. Moreover, the government provides a guarantee to back up the insurers such that there is virtually no risk to the lender that the insurer will be unable to pay up in the event of a default.
Less risk – more lending
The result, of course, is that lenders are exposed to much less risk and can offer more, higher loan to value mortgages. They also have to hold less capital to cover the possibility of a default and can so lend more with the same amount of money.
There is, of course, a cost – to the buyer. Mortgage insurance can be as much as 2.75% of the total loan value for 95% mortgages and more if you are self-employed. You can see the scale of fees here.
Mostly, the Mortgage Insurance is added to the size of the loan so you don’t pay it upfront. But it also means that, as a borrower, you qualify for much lower interest rates on your mortgage. Overall, the Canada Mortgage & Housing Corporation reckons that: ‘For the vast majority of borrowers, the cost……….. is more than fully offset by the savings achieved’.
Now, Mortgage Insurance isn’t the only thing that has kept the mortgages flowing in Canada. It’s also easier for lenders to raise money thanks to a Canada Mortgage & Housing Corporation (CMHC) scheme that guarantees interest rate and capital payments to investors who buy parcels of mortgages. And since the CMHC is government owned, the guarantee is effectively backed by the Canadian government. Regular income, low risk – just what investors ordered.
It’s worth noting, by the way, that mortgage insurance in Canada was launched in the 1950s specifically to make home-ownership possible for a wide range of owner occupiers. I’ve argued before that high loan to value mortgages are essential to prevent home ownership becoming the preserve of the wealthy and it’s interesting to see an effective scheme designed to achieve just that.
Could it work here?
So, could it work here? Interestingly, the Basel Committee on Banking Supervision has just launched a consultation on mortgage insurance. If you have a few hours to spare and have lost the will to live, you can find it here. To be honest, it doesn’t look like the sort of committee to jump to conclusions so nothing is likely to happen very fast at the international level.
But, in principle, mortgage insurance solves the conundrum of how to get banks to lend more at higher loan to value rations without increasing their risk. Whatever the international timescales, there is no reason why the government, in Holyrood or Westminster, should not look at this. At the very least, I’d like to understand why it wouldn’t work.