Mortgage-backed securities sound like Wall Street jargon, but they are one of the forces behind the rate you pay on a Canadian mortgage. When a lender pools insured mortgages and sells the pool to investors, it gets cash to lend again, and that recycling of funds is part of why insured mortgages often carry lower rates than uninsured ones and why fixed rates follow bond yields. This guide explains how the system works; it’s part of the mortgage types and features hub.
What mortgage-backed securities are
| Step | What happens |
|---|---|
| 1 | A lender makes many individual insured mortgages |
| 2 | The lender groups them into a pool |
| 3 | The pool is issued as an NHA mortgage-backed security under CMHC’s program |
| 4 | CMHC guarantees investors timely payment of principal and interest |
| 5 | Investors buy units of the pool |
| 6 | The lender receives cash it can lend again |
| 7 | Borrowers keep paying the lender, and those payments flow through to investors |
Nothing changes for you as a borrower. You keep paying your lender, your mortgage terms stay the same, and the lender still services the loan (collects payments, answers questions). What changes is who receives the economic benefit of your payments.
Who’s involved
| Party | Role |
|---|---|
| Borrower | Makes the mortgage payments |
| Lender (issuer) | Makes the mortgage, pools it and keeps servicing it |
| CMHC | Guarantees timely payment of principal and interest on NHA MBS and on Canada Mortgage Bonds |
| Investors | Buy the securities and receive the cash flows |
| Canada Housing Trust | Issues Canada Mortgage Bonds backed by NHA MBS |
| Government of Canada | Stands behind CMHC’s guarantee |
The NHA MBS program
The National Housing Act Mortgage-Backed Securities program is the main way residential mortgages are securitized in Canada. Only insured mortgages, those carrying default insurance from CMHC, Sagen or Canada Guaranty, can go into an NHA MBS pool; what that insurance is and what it costs is covered in what CMHC insurance is.
| Feature | NHA MBS |
|---|---|
| Guarantee | CMHC, backed by the Government of Canada |
| Eligible mortgages | Insured residential mortgages |
| Payments to investors | Monthly, passed through from borrowers’ payments |
| Issuers | Approved lenders, including banks, credit unions and monoline lenders |
| Cost to the issuer | A guarantee fee paid to CMHC, which becomes part of the lender’s funding cost |
Canada Mortgage Bonds
NHA MBS pay investors monthly and return principal unevenly as borrowers prepay, which many institutional investors don’t want. Canada Mortgage Bonds repackage that cash flow into an ordinary bond.
| Feature | Canada Mortgage Bonds |
|---|---|
| Issuer | Canada Housing Trust |
| Backing | Pools of NHA MBS |
| Guarantee | CMHC, backed by the Government of Canada |
| Payments | Regular coupons, with the principal repaid at maturity |
| Terms | Mainly five and ten years |
Why Canada Mortgage Bonds matter for your rate
Canada Mortgage Bonds trade at a small spread above Government of Canada bonds of the same term, and that spread is part of what lenders pay to fund insured fixed-rate mortgages. Your fixed rate is roughly the Government of Canada bond yield, plus the mortgage-bond spread, plus the lender’s own costs and margin. When investors demand a wider spread, as happened when credit markets seized up in March 2020, fixed mortgage rates can rise even if government bond yields don’t. How bond yields feed into fixed rates is covered in how bond yields affect mortgage rates, and today’s rates are on the mortgage rates page.
Why insured mortgages often get better rates
| Mortgage | Can it go into NHA MBS? | Lender’s funding cost | Typical rate |
|---|---|---|---|
| Insured (less than 20% down) | Yes | Lowest | Lowest |
| Insurable (20% or more down, meets the insurance criteria, insured in bulk by the lender) | Yes, once portfolio-insured | Low to moderate | Moderate |
| Uninsurable (doesn’t meet the criteria) | No: funded from deposits or other sources | Highest | Highest |
That is why a borrower with less than 20% down can be offered a lower rate than one with more: the insured loan is cheaper for the lender to fund. The borrower pays for that through the insurance premium, which the CMHC premium calculator works out. The three categories are explained in insured vs uninsured mortgages.
The funding cycle
| Step | Effect |
|---|---|
| A lender makes insured mortgages | Its capital is lent out |
| The mortgages are pooled into NHA MBS | The capital comes back to the lender |
| The MBS are sold to investors or to the Canada Housing Trust | The lender has fresh funds |
| The lender makes more mortgages | More funding supply and more competition |
Without securitization, lenders would have to hold every mortgage on their balance sheets, funded by deposits, which would limit the funding available and tend to push rates up.
How Canadian MBS differ from the US market of 2008
The 2008 financial crisis was driven largely by losses on US private-label mortgage securities. The Canadian NHA MBS program is built differently:
| Feature | Canadian NHA MBS | US private-label MBS before 2008 |
|---|---|---|
| Government guarantee | Yes, through CMHC | None |
| Mortgages in the pool | Insured mortgages only | Included subprime and low-documentation loans |
| Borrower qualification | Insured borrowers must pass the federal stress test and insurer criteria | No comparable standard |
| Lender’s ongoing role | The lender keeps servicing the loans | Often sold on with no ongoing responsibility |
| Default insurance | On every mortgage in the pool | Often absent |
Because every mortgage in an NHA MBS pool is insured and the guarantee is backed by the government, investors don’t bear the borrowers’ default risk; the insurers and, ultimately, the government do. How the stress test works is covered in the mortgage stress test.
Limits on how much banks rely on securitization
The Office of the Superintendent of Financial Institutions (OSFI) sets liquidity and capital rules for federally regulated lenders, including the Liquidity Coverage Ratio (enough liquid assets for a 30-day stress) and the Net Stable Funding Ratio (stable funding relative to assets). Together they keep banks from depending entirely on mortgage securities for funding, so lending can continue from deposits if the securities market stalls.
The policy debate
Securitization is periodically reviewed as part of federal housing policy. The questions usually raised are whether cheaper, more available mortgage funding adds to demand and prices, how much risk taxpayers carry through CMHC’s guarantee, whether securitization volumes should be capped, and whether more uninsured mortgages should be eligible.
What this means for you
| Effect | How it reaches you |
|---|---|
| Rate pricing | The mortgage-bond market sets a floor under fixed mortgage rates |
| Insured rate advantage | A mortgage with less than 20% down can get a lower rate because it can be securitized |
| Bond sensitivity | Fixed rates move with bond yields even when the Bank of Canada does nothing |
| Market disruptions | If the securities market seizes up, rates can jump for a while |
| Your own mortgage | If it’s insured, it may well be in an NHA MBS pool now, with no change to your terms |
How lenders set rates more generally is covered in how mortgage rates are determined.