In the first installment of our two-part series, we explore the evolving roles of key market players and the legislative changes that paved the way for chartered banks to dominate the Canadian mortgage landscape.
The evolution of the Canadian mortgage market is far more nuanced than the simplified portrayal presented in a recent speech by the Bank of Canada’s Senior Deputy Governor, which suggests that Canadians have always relied on short-term mortgages to finance their homes. From my experience at the Bank of Canada and CMHC, I can attest that this history is much more complex. Mortgage products have evolved in response to shifts in financing structures and changes in the way risks are shared between lenders and borrowers. Many of these changes were driven by the economic impact of high interest rates. This rich history illustrates how economic conditions, policy shifts and legislative changes have continually shaped mortgage financing, resulting in the diverse and dynamic market we see today.
1950s: Bank Act amendments change the mortgage landscape
Contrary to the dominant role of chartered banks today, their participation in the mortgage market only began after the 1954 Bank Act permitted them to lend against insured mortgages. Before this, life insurers were the primary mortgage lenders, as longer-term mortgages matched their liability structures. This arrangement offered stability, with terms typically 25 years or longer.
The government’s role in the mortgage market has also evolved. Prior to the 1954 Bank Act changes, the Canadian government participated in the mortgage market using a “joint lending” model. Under this arrangement, the government and private sector lenders shared the responsibility of providing mortgage financing to borrowers. Typically, the government would lend a portion of the mortgage amount directly to the borrower, alongside private sector lenders who provided the remainder. This approach aimed to address growing housing shortage concerns and help finance homeownership, but it also exposed the government to financial risks associated with the loans.
The 1954 Bank Act and subsequent amendments shifted this model. Instead of the government directly lending to borrowers, it transitioned to insuring mortgages through the National Housing Act (NHA). This allowed private lenders, including banks, to offer mortgages while being insured against potential losses by the Canada Mortgage and Housing Corporation (CMHC). This change encouraged more private sector participation and reduced the government’s direct involvement in lending, while still supporting housing affordability.
1960s: Legislative changes drive a shift in lender dominance
Until the late 1960s, mortgage terms were typically 25 years or longer. With life insurers being the dominant lenders, mortgages provided a long-term asset against their core liability – life insurance policies. To encourage lenders to extend loan terms to 30-years, the 1954 NHA introduced special loss settlement provisions for loans with terms exceeding 25 years. Specifically, the government agreed to absorb additional losses for the extended term.
Banks initially supplied more than half of the funding for NHA-backed mortgages after being permitted to enter the market.[1] However, following a recession in the later part of the 1950s, the government revived its direct lending program. By 1957, CMHC provided just over 47 per cent of NHA-backed mortgage funds, a sharp increase from less than 3 per cent in 1955.[2] Between 1957 and 1967, CMHC funded more homes than the banks.
In the 1960s, CMHC focused on improving liquidity and addressing yield imperfections in NHA mortgages. In 1966, the mortgage rate was tied to the average yield on long-term bonds, and by 1969, the rate cap was removed, allowing the NHA mortgage rate to adjust according to market conditions.[3]
Legislative changes were also made to encourage more bank participation in mortgage lending. The 1967 amendments to the Bank Act permitted banks to provide conventional mortgages without CMHC insurance. Previously, bank lending had been constrained due to a statutory interest rate cap of 6 per cent. This cap was removed in 1967, making mortgage lending attractive for the banks.
Another key legislative change in 1967 was the introduction of deposit insurance for banks, trusts and mortgage loan corporations. Banks and trusts typically funded their mortgages with GICs. Deposit insurance was available for GICs with terms up to five years, which incentivized lenders to focus on offering shorter-term mortgages. This legislative shift set the stage for further changes in the Canadian mortgage landscape, paving the way for the banking sector’s increasing involvement in mortgage lending.
In the second part of this series, we’ll delve deeper into the later developments that further shaped the modern mortgage market, highlighting how these foundational shifts set the stage for today’s diverse and dynamic mortgage financing system.
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
