Bob Alexander on Mon, Apr 11, 2011 wrote:
Canadian Mortgages at Risk?
Every year the Canadian Association of Mortgage Professionals ( CAAMP ) carries out research on the Canadian mortgage market. I have referenced these reports and their findings in earlier commentaries. The general media has a tendency to over hype concerns about Canadians and their respective debt levels. The CAAMP report, I feel, brings a more realistic and balanced viewpoint and can be used to determine the reality of Canadians and their debt loads. I have summarized the reports finding below.
Rapid Expansion of Debt
Residential mortgage credit has expanded very rapidly during the past decade, at an average of 10% per year. This growth has, understandably, raised fears. However, the report found this increase is related to a strong Canadian economy. The employment rate rose rapidly and reached all time highs in 2007 and 2008. This resulted in a need for more homes which led to an increase in mortgage debt.
Report found that both lenders and borrowers are very prudent in the mortgage market. Studies showed that the vast majority of borrowers have left considerable room to absorb increases in interest rates.
Impact of Future Interest Rate Increases
To determine the effect of an increase in mortgage rates (both fixed and variable) the study assumed a rate of 5%. This represents about a 1% increase over today’s fixed interest rate and an increase of more than 2.5% above today’s variable rates. The report found that as a result of this simulated increase about 2000 to 2500 mortgages would exceed typical lender guidelines for affordability. This represents an extremely small number relative to the total number of households in Canada (about 13.5 million). The author of the report felt the magnitude of the interest rate increases was large and unlikely to become this high.
There is always risk in the mortgage market. In Canada, the major risk factor is a loss of ability to pay (especially due to job loss). Secondary risk factor is an unaffordable increase in payments. The report concluded that this risk is negligible at present and in the near to medium term. As you are aware there has been recent legislation to tighten mortgage lending criteria. The report concludes that the lending guidelines are tight enough. So, are Canadian mortgages at risk? Risk always exists but the risk is quite low that Canadians will have affordability issues should interest rates rise in the future. This speaks well with regards to Canadian lenders, brokers and borrowers.
Your Mortgage Doctor
Bob Alexander, B.Comm, CMA, AMP