Mortgage debt in Canada is skyrocketing. This is no reason to panic

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Canada’s credit environment is not comparable to that of the United States before 2008

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After a year of price-breaking shredding sales across the country, it’s no surprise that Canadian buyers are reaching new heights when it comes to their mortgages.

Following a march that saw them incur $ 12.9 billion in mortgage debt, Canadians borrowed An additional $ 17.7 billion in mortgage loans in April, according to Statistics Canada. This is the highest monthly figure on record. At the end of April, the debt secured by real estate, which represents both mortgages and home equity lines of credit, stood at $ 1.96 trillion.

It’s always scary when words like “debt” and “billion” appear in the same conversation. The mind inevitably creates a doomsday scenario where these trillions of dollars in debt cannot be repaid, the economy capsizes and we plunge into recession.

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Could some of these mortgages go awry and become unpayable? Absolutely. But there are several reasons why Canada’s mountain of mortgage debt is unlikely to tip over and crush us all.

Reasons to worry

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When the Canadian real estate market was adrift at the start of the COVID-19 pandemic, low interest rates were to be the tug that guided it to calm waters. It only took a few months for consumers to pile in and raised house values.

But today’s low interest rates cannot last. The Bank of Canada has previously hinted that it may raise its overnight rate from a historic low of 0.25% – where it has been since it was cut twice in March 2020 – over the course of the second half of 2022. the fear is that the cost of borrowing will skyrocket and countless Canadians will no longer be able to wear what is now. affordable mortgages.

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CIBC Deputy Chief Economist Benjamin Tal is an expert sounding the alarm in the event of a tariff shock.

Due to the high levels of non-mortgage debt of Canadians, $ 783 billion and more in April According to StatsCan, Tal believes homeowners are very sensitive to the risk of rising interest rates. He estimates that a one point increase in interest rates today would have the same impact on consumers as a two point increase would have had two years ago.

Homeowners who do not have room in their budget for a one point increase in their mortgage rates will likely have difficulty affording a growing mortgage.

But how many Canadians will be in this situation when interest rates rise?

Reasons to breathe easily

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There are at least four reasons to believe that Canadians will be able to continue making their mortgage payments even if rates rise.

1. High underwriting standards among Canadian lenders

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When most Canadians think of a real estate crash, they remember that the US market collapsed during the 2008 financial crisis. This is unlikely to happen in Canada.

Canada’s lenders are notorious for their conservatism. If a buyer does not have the right balance between income, debt and solvency, a mortgage with a reputable lender does not cross the finish line.

The pre-crisis real estate frenzy in the United States happened due to a lack of lending standards. NINJA loans – no income, no jobs or assets – were not only common, but encouraged by some lenders seeking to channel subprime lending into an opaque system of mortgage-backed securities where bad mortgages could become a problem. profitable business.

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The tacit acceptance of these practices at the regulatory level does not exist in Canada. Our lenders follow the standards that govern the majority of mortgages approved here.

2. The stress test

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Although looked down upon by many first-time home buyers in Canada, mortgage stress test is another powerful protection against borrowers who find themselves underwater.

As of June 1, loan applicants must be able to prove that they can afford an interest rate of 5.25% for their loans to be approved, regardless of the mortgage rate offered by their lender.

Mortgage rates today are nowhere near 5.25 percent. Five-year fixed rate products hover around 2%, while five-year variables hover around 1.5%. If the stress test is correct, recent borrowers should see their interest rates more than double before they find themselves in financial jeopardy.

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There is a reason that is not likely to happen.

3. The Bank of Canada will not rush to raise rates

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Tal’s interview with BNN this week made your heart beat faster when he said that a rapid increase in Bank of Canada interest rates “would be devastating for the housing market.”

Presumably the Bank of Canada, which manages the health of the economy as a whole, is aware of this. A rapid overnight rate hike would not only destabilize the housing market, it could derail Canada’s economic recovery after COVID-19 by suddenly raising the cost of borrowing for everyone.

“The hope is that they will move early and slowly, and in doing so, you will actually limit the damage to the mortgage market and the housing market,” Tal said. “I think the fact that the Bank of Canada is telling us that it will move in the second half of 2022, which is much earlier than expected just a few months ago, is a very positive sign.”

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4. Most Canadians Have Fixed Rate Mortgages

Types of mortgage rates

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Recent homebuyers who have opted for variable rate mortgages may indeed face unease when rates start to rise.

But Canadians overwhelmingly choose fixed rate products. In his Annual State of the Residential Mortgage Market in Canada For 2020, mortgage professionals across Canada found that 77 percent of mortgages taken out last year involved fixed-rate products. Variables only accounted for 18 percent. The remaining five percent were combination mortgage products.

This means that nearly 80% of homebuyers in 2020 will not be affected by a rate hike until the end of their mortgage term. Since most fixed rate mortgages in Canada last for five years, this gives homeowners enough time to build equity in their home. quickly appreciating the houses.

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The projects of the Canadian Real Estate Association an increase of 19.3 percent in the average price of houses in 2021. In its most recent Housing Market Outlook, the Canada Mortgage and Housing Corporation expects house prices to continue rising in all major Canadian markets through 2023.

If homeowners aren’t able to maintain their payments after their mortgage terms have expired, they should be able to sell and walk away with their finances – and financial futures – intact.

This article was created by Wise Publishing, Inc., which provides clear, reliable information people can use to take control of their finances. Millions of readers across North America rely on the Toronto-based company to help them save money, find the best bank accounts, get the best mortgage rates, and navigate many other financial matters.

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