Canadian mortgage insurers are guaranteeing billions of dollars’ worth of loans for which borrowers increasingly owe more than the value of their property.
Financial disclosures from Canada’s three major mortgage insurers show that the drop in home prices over the past year has chipped away at the equity in homeowners’ properties. A rising number of them now owe more than their homes are worth, which ramps up insurers’ risks of payouts.
The more a homeowner owes relative to the property value, the more it pushes up a key lending metric called the loan-to-value (LTV) ratio.
The higher the ratio, the riskier the loan is for the lender, and for mortgage insurers that cover banks against losses if homeowners default on their payments. While mortgage insurers are showing historically low delinquencies, they are facing growing risks of elevated insurance payouts if homeowners are not able make higher mortgage payments.
The disclosures provide a window into the precariousness of the mortgage market after the Bank of Canada raised its key interest rate to 4.5 per cent from 0.25 per cent in under a year. The spike in borrowing costs slowed the housing market and led to a 15.5-per-cent drop in national home prices over the past year. That in turn has pushed some homeowners’ loans underwater.
The federal bank regulator considers a loan riskier if the homeowner owes more than three-quarters of the value of their home, meaning an LTV ratio of more than 75 per cent.
Now, insurers are reporting that a growing share of their individual mortgage borrowers have an LTV ratio above that threshold. In some cases, borrowers have mortgages that are bigger than the updated value of their property, or an LTV ratio greater than 100 per cent.
Disclosures from Canada Guaranty Mortgage Insurance Co. show its proportion of loans with an estimated LTV ratio above 100 per cent increased by more than six times to nearly $4-billion in the fourth quarter of last year. That represented 5 per cent of its outstanding insured mortgages for individuals, according to Canada Guaranty’s quarterly portfolio metrics.
That is up from $532-million, or 0.74 per cent of its outstanding insured mortgages in the fourth quarter of 2021, according to the disclosures.
Canada Guaranty calculated estimated LTV ratios by using the current mortgage balance divided by the estimated current property value. The company adjusted property values based on recent declines in home prices in different communities.
However, the drop in home values has not so far led to greater losses for mortgage insurers. Canada Guaranty’s delinquency rate was 0.1 per cent at the end of last year. Canada Guaranty spokeswoman Mary Putnam said that was a historical low. She said the insurer has “proven processes in place to work with our lenders to keep borrowers in their homes.”
“Canada Guaranty is well capitalized to withstand extremely severe macroeconomic scenarios, inclusive of additional capital for loans with higher loan-to-values,” Ms. Putnam, a senior vice-president with the insurer, said in an e-mailed statement.
Mortgage insurance is required if a borrower makes a down payment that is less than 20 per cent of the purchase price of the property. The insurance protects the lender against losses if the borrower defaults on mortgage payments.
The country’s other two insurers, Sagen MI Canada Inc. and Canada Mortgage and Housing Corp., also reported that the proportion of loans with the highest LTVs doubled in 2022.
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Those two insurers do not provide detail on LTV ratios over 100 per cent. Their highest reported ratio category is greater than 95 per cent.
Sagen had $14-billion, or 10 per cent, of its outstanding insured mortgages with an effective LTV ratio over 95 per cent in the fourth quarter of last year. That’s compared with $7-billion, or 5 per cent, of its outstanding insured mortgages in the same period in 2021, according to its recent financial disclosures.
The company did not respond to a question on why it does not provide additional information on loans that top 100 per cent. Sagen also did not respond to a question on whether it is currently insuring loans that are larger than the estimated property value.
CMHC, the taxpayer-funded mortgage insurer, showed similar growth in its LTV ratios for homeowners with insured mortgages. Its results for the third quarter of 2022 show that 2.8 per cent of its insured loans had an updated LTV over 95 per cent. That represents an outstanding insured mortgage balance of $5-billion.
In the fourth quarter of 2021, the period before home prices started to drop, CMHC’s percentage with the highest LTV was 1.2 per cent, representing an outstanding insured balance of $2.3-billion.
CMHC spokeswoman Claudie Chabot said that, historically, the percentage of loans with an LTV over 95 per cent was very low, and so it did not seem necessary to report loans over 100 per cent.
“Although the overall proportion of loans with LTV greater than 95 has increased, the number with LTV greater than 100 remains low,” she said in an e-mailed statement.
In the third quarter, 0.3 per cent of CMHC’s total outstanding portfolio had an LTV over 100 per cent, according to Ms. Chabot.
“We are continuously monitoring the profile of our business and adjusting our underwriting policies as needed,” she said.
The Bank of Canada has said it is fully aware of the impact that higher interest rates have had on borrowers with variable-rate mortgages. In Canada, the most popular variable-rate product has fixed monthly payments. That means when interest rates rise, a higher share of the borrower’s monthly payment goes toward interest and less toward principal reduction.
The interest rates have risen so quickly that borrowers have found themselves in a position in which their monthly payment does not cover the entire interest portion of their loan. The unpaid interest is then added to the principal, and the borrower’s original loan amount increases. That also has contributed to the higher LTVs.