In April 2021, Canadians amassed the highest levels of new mortgage debt ever in a single month, adding almost $18 billion in new mortgages. In fact, mortgage debt in Canada is at an all-time high. Collectively, we owe nearly $2 trillion to mortgage lenders - that's more than $50,000 for each and every one of us. Other than the fact that $2 trillion is a massive number and that it's nearly equivalent to the value of the Canadian economy (the GDP), why is this statistic noteworthy? Well, one reason is that ratio of mortgage debt to GDP in Canada has already exceeded the 70% ratio the United States experienced in advance of the housing crisis in 2008. Should we be worried? The short answer is probably not, but let's dig a little deeper into the reasons why economists are merely reporting the stats rather than sounding the alarm.
Canadian Banks are Cautious
One reason why high levels of mortgage debt in Canada is less of a concern than it was for US lenders is that Canadian banks, which hold the overwhelming majority of Canadian mortgages, have much more stringent criteria for assessing risk.
Credit rating
With a recent change to the rules governing mortgage applications, the minimum credit score needed by at least one of the borrowers was raised to 680. That puts some of the riskiest applicants out of the running for mortgages.
Income-to-Debt and Debt-Service Ratios
Lenders use these two ratios to assess your ability to afford your mortgage based on your income, other existing debts and carry costs of the home. In June 2021, the criteria for both were increased, making it more difficult for people to get approval unless they have a sufficient cushion to work with.
Mortgage Stress Test
As we explained in a previous blog, the mortgage stress test is making it harder to get a mortgage, especially for first-time buyers. The stress test is a calculation used by banks to determine whether you would be able to withstand an increase in interest rates in the future.
The People are Also Cautious
As it turns out, many of us don't have the stomach for variable mortgage rates. 77% of Canadian mortgages are fixed-rate mortgages which insulate homebuyers from rapid changes in the cost of their mortgage as interest rates rise. At the onset of the housing crisis in the US, interest rates increased, meaning that many people could no longer afford their mortgages. Homeowners tried to sell but found that the value of their home had dropped to the extent that many people owed more than the home was now worth.
Calling it 'Good Debt'
In general, Canadians are of the opinion that while consumer debt is negative, they are generally ok with mortgage debt. After all, your home is an investment, and as you pay the mortgage down, you are building equity - all while the value increases. That's a pretty compelling argument. However, you should never lose sight of the fact that you can still get into trouble with mortgage debt. It's important to take on only what you can afford today and what you can realistically expect to afford in the future - even as things change.
Here's where working with a mortgage broker can really come in handy. Knowing your situation and your financial goals, your mortgage broker can help you find the right type of mortgage that will leave you on a sound financial footing for some time to come. Whether it's an open or closed mortgage, variable, or fixed-rate, a mortgage broker can find the best rates for you. Your broker can also help if you've had trouble getting a mortgage because you failed to meet some of the strict criteria, are self-employed, or have experienced a hit to your credit rating. Get in touch with a mortgage professional to find out how they can help.