Due to the increase in Canadian household debt and rises in the Toronto housing market, the Bank of Canada has identified some major risks that may affect the financial system of our economy. However, in despite of this they seem to be confident that economic conditions will improve, nationally. They have hinted that they might increase interest rates in the near future.
If interest rates increase, it will most definitely impact the federal interventions in the mortgage market tremendously.
Late last year there were other changes that had a positive impact on the debt-to-income ratios for insured mortgage. However, these changes also contributed to rising market share for new, uninsured mortgages. It was an unforeseen and unintended impact, but the Bank of Canada is now looking at uninsured mortgages more closely to see what action may be required.
The Ministry of Finance and the CMHC, will likely stand behind the bank in support of these growing concerns. The higher than normal and ongoing increases in debt-to-income ratios for uninsured mortgage may also warrant an investigation, to see what additional regulations may be required.
Home Equity Lines of Credit (HELOCs) could also be contributing to increasing household debts, since they have increased at rates above income growth since early 2016. They’ve also accounted for approximately 10 percent of total outstanding household credit. There are other concerns circulating that HELOCs may be putting some Canadians at risk of over borrowing.
The Department of Finance may also be considering whether or not to extend the stress test for insured mortgages, to uninsured mortgages too. Essentially, this will create an even playing field for lenders who generate a larger portion of insured mortgage, helping to cool the markets in Toronto and the GTA. However, it could also negatively impact the rest of the Canadian housing market in other places outside of the GTA, that are not currently suffering from the same vulnerabilities. It could become unnecessary if interest rates are raised by the Bank of Canada.
Although The Bank of Canada recognizes the negative impacts that the recent changes have had on mortgage lenders that rely on portfolio insurance and that the increased growth in uninsured mortgages have created an opportunity for private residential mortgage-backed securities they feel that “properly structured private securitization would benefit the financial system by helping lenders fund loans.” It’s quite surprising that this issue in particular hasn’t got more attention due to the Bank of Canada endorsing a shift away from CMHC-backed mortgage securities to a private sector mortgage securitization market.
It is our hope that the federal government changes their focus to unsecured household debt and moves away from further restrictions on secured debt. Keep your eyes out for changes to HELOCs, B-20 changes and the stress test being applied to uninsured mortgages.
To learn more about mortgage market trends and changes, get in touch with AKAL Mortgages.
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