What Are Canada Mortgage Bonds?
What You Should Know
- Canada Mortgage Bonds (CMBs) are debt securities issued by the Canada Housing Trust (CHT) to support the mortgage market.
- These bonds are backed by insured residential mortgages and offer investors low-risk, fixed-income returns while providing funding for Canadian mortgage lenders.
- Purchasing Canada mortgage bonds (CMBs) is the safest way to lend your money.
- CMBs are as secure as Canadian government bonds while offering higher yields.
Canada Mortgage Bonds: Overview
The government wants to facilitate homeownership for Canadians. To this end, the Canadian government facilitate home financing for Canadians by enabling Canadian mortgage lenders to fund their mortgages cheaply. Canada Mortgage and Housing Corporation (CMHC) set up the Canada Housing Trust (CHT) in 2001. Since then, the CHT is always ready to purchase mortgage-backed securities (MBS), ensuring Canadian mortgage lenders can always sell their mortgages and use the proceeds to lend out more mortgages.
CIBC Mellon Trust Company, as trustee for CHT, sells CMBs in order to pay for purchasing MBSs on behalf of the CHT. The main rule of CHT is to convert the MBS cash flow consisting of interest and principal payments into bond cash flow consisting of periodic interest payments and principal payments at maturity. As Canadian mortgage bonds are used to fund Canadian mortgages, their yield, determines Canadian mortgage rates.
List of Canada Mortgage Bonds issued since the start of 2023
| Issue | Settlement Date of Original Issue | Coupon | Maturity Date | Interest Payment Frequency | Issued to Investors | Issued to the Government of Canada |
|---|---|---|---|---|---|---|
| Series 112 | February 23, 2023 | 3.65% | June 15, 2033 | Semi-Annually | $8,000 m | - |
| Series 113 | March 22, 2023 | 3.10% | June 15, 2028 | Semi-Annually | $5,000 m | - |
| Series 114 | May 25, 2023 | CORRA + 0.25% | September 15, 2028 | Quarterly | $2,250 m | - |
| Series 115 | June 21, 2023 | 3.95% | June 15, 2028 | Semi-Annually | $5,000 m | - |
| Series 116 | August 23, 2023 | 4.15% | June 15, 2033 | Semi-Annually | $4,000 m | - |
| Series 117 | September 22, 2023 | 4.25% | December 15, 2028 | Semi-Annually | $11,000 m | - |
| Series 118 | November 21, 2023 | 4.25% | March 15, 2034 | Semi-Annually | $15,000 m | $7,000 m |
| Series 119 | November 21, 2023 | CORRA + 0.265% | March 15, 2029 | Quarterly | $1,000 m | - |
| Series 120 | March 20, 2024 | 3.70% | June 15, 2029 | Semi-Annually | $4,000 m | $4,000 m |
| Series 121 | March 24, 2024 | CORRA + 0.28% | September 15, 2029 | Quarterly | $500 m | - |
CORRA stands for Canadian overnight repo rate average. It is the main benchmark for variable rate lending in Canada’s financial system.
CMHC guarantees both interest and principal payment for CMBs on behalf of the Canadian government for a one time fee. The guarantee fee is payed to CMHC by CHT and charged to sellers of MBSs. However, this guarantee creates limited risk for the Canadian government since only insured mortgages are included in MBS purchased by CHT. Insurable mortgages are also typically insured by the lenders and included in the MBS. Further, CMHC takes on the risk when the National Housing Act Mortgage-backed securities (NHA MBS) are created before they are purchased by the Canada Housing Trust (CHT).
CMBs are issued with a 5-year term or a 10-year term. They are issued either with a fixed interest rate or a variable interest rate. Fixed-rate CMBs pay interest semiannually, while variable-rate CMBs pay interest quarterly. The Canadian government guarantees CMBs, and their yield is higher than that of the Government of Canada (GoC) bonds with corresponding maturity dates. That is, 5-year CMBs yield slightly more than 5-year GoC bonds and 10-year CMB yield slightly more than 10-year GoC bonds.
Thus, there seems to be an arbitrage opportunity between GoC bonds and CMB. To take advantage of this opportunity, GoC has been purchasing significant amounts of CMB since the second half of 2023. In 2024 GoC intends to purchase half of the fixed-rate CMB issuance and leave the variable-rate issuance to other investors. Bank of Canada (BoC) used to be a significant purchaser of CMB until April 2022 when it started quantitative tightening. BoC has indicated that it would not reenter the CMB market after the end of quantitative tightening.
Annual Issuance of Canada Mortgage Bonds (CMBs) since 2015
| Year | Average Coupon | Total Issuance (in million) | Term to Maturity |
|---|---|---|---|
| 2015 | 2.32% | $17,000 | 10 Y |
| 2016 | 1.90% | $7,000 | 10 Y |
| 2017 | 2.35% | $14,750 | 10 Y |
| 2018 | 2.65% | $10,750 | 10 Y |
| 2019 | 1.92% or 3m CDOR -0.026% | $26,500 | 10 Y or 5 Y |
| 2020 | 1.29% or 3m CDOR -0.11% | $32,000 | 10 Y or 5 Y |
| 2021 | 1.49% or 3m CDOR -0.175% | $40,000 | 10 Y or 5 Y |
| 2022 | 3.47% or CORRA + 0.315% | $34,750 | 10 Y or 5 Y |
| 2023 | 4.02% or CORRA + 0.255% | $58,250 | 10 Y or 5 Y |
The amount of money funnelled to Canada’s housing market through the CMB program is growing very fast.
How to Invest in Canada Mortgage Bonds (CMBs)?
Bonds (including CMBs) can be purchased either in the primary market or in the secondary market. Purchasing on the primary market means purchasing at the time of the bond issuance through one of the investment banks acting as an underwriter, while purchasing on the secondary market means purchasing from another investor after the issuance is completed. The minimum purchase size in the primary market is large, and thus, this market is for institutional investors.
In general, government bonds and agency bonds (CMBs) are not listed in an exchange. They are traded over the counter between brokers and broker-dealers. If you are interested in investing in CMBs, you can do so via your stock broker. You need to check their minimum purchase size and commission. The minimum order size depends on your broker and might be $5,000 or $10,000 face value.
Since allocation of a large portion of your portfolio to a single issue is not advisable, the purchase of individual bonds can only be advised for portfolios well over $100,000.
What is "NHA MBS" in Canada?
In Canada, "NHA MBS" stands for "National Housing Act Mortgage-Backed Securities." These are securities issued by financial institutions and guaranteed by the Canada Mortgage and Housing Corporation (CMHC), a federal government agency. Here’s a breakdown of the key elements related to the NHA MBS:
- National Housing Act (NHA):This act provides the framework for the NHA MBS program. It is designed to improve housing conditions and assist in financing housing across Canada.
- Mortgage-backed securities (MBS) are investmentssecured by a pool of mortgages. Investors in MBS receive periodic payments derived from the principal and interest payments made by homeowners on the mortgages within the pool.
- CMHC Guarantee: CMHC guarantees the timely payment of interest and principal to investors in NHA MBS. This guarantee reduces investors' risk, making these securities more attractive and generally ensuring a stable and reliable investment vehicle.
- Purpose: The primary purpose of NHA MBS is to provide a reliable source of funding for mortgage lenders, enabling them to offer more competitive mortgage rates and terms to borrowers. This, in turn, supports the housing market and helps Canadians access affordable housing.
- Investment Vehicle: Because of the government guarantee, NHA MBS are considered relatively low-risk investments. They are commonly used by institutional investors, such as pension funds and insurance companies, who are looking for stable, long-term returns.
Overall, NHA MBS play a crucial role in Canada's housing finance system, ensuring that the amount of money available to be lent to Canadian homes is almost unlimited.
CMHC Guarantee Fee Table
| Term of Bond | Fee Payable |
|---|---|
| Less than 2.5 years | 0.15% |
| 2.5 years to 3.5 years | 0.21% |
| 3.5 years to 4.5 years | 0.26% |
| 4.5 years to 5.5 years | 0.30% |
| 9.5 years to 10.5 years | 0.60% |
Who are the largest issuers of NHA MBS?
The largest National Housing Act Mortgage-Backed Securities (NHA MBS) issuers in Canada typically include major financial institutions and mortgage lenders. Some of the key players in this market are:
- Canadian Banks: Major Canadian banks, such as Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), and Canadian Imperial Bank of Commerce (CIBC), are significant issuers of NHA MBS. These banks have extensive mortgage portfolios and leverage the NHA MBS program to manage their funding needs. Unlike smaller issuers, these banks, in many cases, keep their NHA MBS on their balance sheet.
- Credit Unions: Large credit unions, such as Vancity and Desjardins, also participate in the issuance of NHA MBS. These institutions serve regional markets and utilize the NHA MBS program to support their mortgage lending activities.
- Mortgage Finance Companies: Specialized mortgage finance companies like First National Financial, MCAP, and Equitable Bank are significant issuers of NHA MBS. These companies focus on originating and servicing residential mortgages, and the NHA MBS program provides them with a cost-effective funding mechanism.
- Canada Mortgage and Housing Corporation (CMHC): While CMHC itself does not issue NHA MBS, it plays a crucial role in the program by guaranteeing the securities. This guarantee makes the NHA MBS attractive to investors, ensuring liquidity and stability in the market.
These institutions utilize the NHA MBS program to securitize their mortgage portfolios, enabling them to raise funds and manage risk effectively.
Is Canada Housing Trust a large purchaser of NHA MBS?
Canada Housing Trust (CHT) is a significant purchaser of the National Housing Act Mortgage-Backed Securities (NHA MBS) in Canada. CHT is a special-purpose trust established by the Canada Mortgage and Housing Corporation (CMHC) to facilitate the securitization of residential mortgages.
Here are some key points about Canada Housing Trust and its role in purchasing NHA MBS:
- Purpose: The primary purpose of CHT is to purchase NHA MBS from various issuers and, in turn, issue Canada Mortgage Bonds (CMBs). These bonds are sold to investors, and the proceeds from the sale are used to purchase more NHA MBS. This process provides a stable and reliable source of funding for mortgage lenders.
- Role in the Market: By purchasing NHA MBS, CHT helps to ensure liquidity and stability in the Canadian mortgage market. This activity supports mortgage lenders in their ability to offer competitive mortgage products to consumers.
- Investor Appeal: CMBs issued by CHT are highly attractive to investors due to their government guarantee by CMHC, which ensures the timely payment of principal and interest. This makes them a low-risk investment option.
- Scale of Operations: CHT is one of the largest players in the Canadian securitization market, and its activities significantly impact the availability and cost of mortgage financing in Canada. By purchasing large volumes of NHA MBS, CHT helps maintain a steady flow of capital into the housing finance system.
Who are the other large purchasers of NHA MBS?
Apart from Canada Housing Trust (CHT), other large purchasers of National Housing Act Mortgage-Backed Securities (NHA MBS) in Canada typically include a variety of institutional investors. These investors are attracted to NHA MBS due to the government guarantee provided by the Canada Mortgage and Housing Corporation (CMHC), which makes these securities relatively low-risk. Some of the major categories of purchasers are:
- Pension Funds: Large pension funds such as the Canada Pension Plan Investment Board (CPPIB), Ontario Teachers' Pension Plan (OTPP), and the Caisse de dépôt et placement du Québec (CDPQ) are significant purchasers of NHA MBS. These funds seek stable, long-term returns to meet their obligations to pensioners.
- Insurance Companies: Major insurance companies like Manulife Financial, Sun Life Financial, and Great-West Life often invest in NHA MBS as part of their portfolio of fixed-income securities. These investments help them match their long-term liabilities with stable income-generating assets.
- Mutual Funds and Asset Managers: Investment management firms, mutual funds and ETFs that specialize in fixed-income securities also invest in NHA MBS. Firms such as RBC Global Asset Management, TD Asset Management, and BlackRock Canada include NHA MBS in their portfolios to offer stable returns to their clients.
- Banks and Credit Unions: While banks and credit unions issue NHA MBS, they may also hold these securities in their investment portfolios to manage their liquidity and earn a stable return on their assets.
- Sovereign Wealth Funds: Some foreign sovereign wealth funds may also invest in Canadian NHA MBS, attracted by the safety and stability of these government-backed securities.
- Foreign Institutional Investors: International institutional investors seeking low-risk investments may also purchase NHA MBS, given their strong credit quality and government guarantee.
What is the process for creating NHA MBS?
Creating the National Housing Act Mortgage-Backed Securities (NHA MBS) in Canada involves several steps, ensuring that the mortgages are pooled together, securitized, and sold to investors. Here’s an overview of the process:
- Origination of Mortgages: Financial institutions (banks, credit unions, and mortgage finance companies) originate residential mortgages that are eligible for inclusion in an NHA MBS pool. The Canada Mortgage and Housing Corporation (CMHC) or another approved insurer must insure these mortgages under the National Housing Act.
- Pooling of Mortgages: The originating financial institution pools together a collection of these insured mortgages. Each pool must meet specific criteria regarding the types and characteristics of the mortgages included, such as loan-to-value (LTV) ratios, credit quality of borrowers, and geographic distribution.
- Submission to CMHC: The financial institution submits the mortgage pool to the Canada Mortgage and Housing Corporation (CMHC) for approval. CMHC reviews the pool to ensure it meets the necessary criteria and standards for inclusion in the NHA MBS program.
- Issuance of NHA MBS: Once the pool is approved, the financial institution issues the NHA MBS, backed by the pool of mortgages. These securities are then sold to investors. The NHA MBS represents an undivided interest in the pool, with the payments of principal and interest on the underlying mortgages flowing through to the investors.
- CMHC Guarantee: CMHC provides a timely payment guarantee on the NHA MBS, ensuring that investors receive their principal and interest payments on time, even if there are delays or defaults on the underlying mortgages. This guarantee enhances the attractiveness of NHA MBS to investors by reducing credit risk.
- Servicing of Mortgages: The originating financial institution or a designated mortgage servicer continues to manage the mortgages in the pool. This includes collecting monthly payments from borrowers, managing delinquencies, and handling any defaults or foreclosures.
- Distribution of Payments: Payments from the underlying mortgages (both principal and interest) are collected by the servicer and passed through to the investors in the NHA MBS. These payments are typically made on a monthly basis.
- Secondary Market Trading: NHA MBS can be traded in the secondary market after issuance. Investors can buy and sell these securities, providing liquidity and flexibility.
What are the mortgage eligibility conditions for inclusion in NHA MBS?
The mortgage eligibility conditions for inclusion in the National Housing Act Mortgage-Backed Securities (NHA MBS) are established by the Canada Mortgage and Housing Corporation (CMHC). These conditions ensure that the mortgages within the pool meet specific criteria related to insurance, quality, and other characteristics. Here are the key eligibility conditions:
- CMHC Default Insurance: All mortgages in the pool must be insured under the National Housing Act. This insurance protects against borrower default, ensuring the security of the investment.
- Residential Property: The mortgages must be secured by residential properties, which can include single-family homes, multi-unit residential buildings, and condominiums.
- Amortization Period: The amortization period of the mortgages should typically be within the standard range accepted by CMHC. This is usually up to 25 years for most residential mortgages.
- Credit Quality of Borrowers: Borrowers must meet certain creditworthiness criteria, including a satisfactory credit score and financial stability.
- Mortgage Terms: The terms and conditions of the mortgages must be standard and meet CMHC guidelines. This includes fixed or variable interest rates, payment schedules, and other contractual terms.
- Compliance with Legal and Regulatory Requirements: All mortgages must comply with relevant federal and provincial laws and regulations governing mortgage lending and consumer protection.
- Documentation and Reporting: The originating financial institution must provide complete and accurate documentation for each mortgage in the pool. This includes loan agreements, property appraisals, insurance certificates, and other required documentation.
- Quality Control: The financial institution must have adequate quality control processes in place to ensure that the mortgages meet CMHC's standards and eligibility criteria.
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