The federal government’s attempt to cool off the hot housing market has resulted in a new and unforeseen risk—a rising number of uninsured mortgages. The Bank of Canada’s (BoC) semi-annual Financial System Review (FSR) revealed a troubling trend that could seriously impact the country’s economic health. A Globe and Mail article on the risk of uninsured mortgages highlighted the 3 main concerns of the central bank:
- Mortgage credit is climbing faster than disposable income in Canada
- Tighter qualification rules for insured mortgages coupled with surging home prices in Toronto and Vancouver may be pushing more buyers towards uninsured mortgages
- An increasing share of the $1.46 trillion in outstanding mortgage debt, now at 46%, is uninsured
Simply put, the federal government’s debt tightening measures appear to have worked adversely. The reduction in high-ratio mortgages (with a down payment of at least 5% but less than 20% of the purchase price) is little reason to celebrate. To avoid the greater scrutiny and mortgage insurance, many higher-risk buyers are resorting to unhealthy means to obtain low-ratio home loans (requiring a minimum down payment of 20%).
How Uninsured Mortgages Raise Risk
A HIBUSINESS report stated that more than 80% of new mortgages issued by the Big Six Banks in Toronto and Vancouver do not require insurance because they are low ratio. However, as BoC’s deputy governor, Carolyn Wilkins pointed out, it is unclear where many Canadians are getting the money to make the larger down payments to bypass mortgage insurance altogether. Let us look at 3 reasons why this is risky business.
- Rising debt: Drawing on lines of credit or other types of secondary loans from unregulated lenders puts borrowers and the financial system at risk, as Wilkins explained. Financial analysts are alarmed as the ratio of debt to disposable income in Canada has reached unprecedented levels. It is now just shy of 170%, well above what it was in the United States before the housing market there crashed almost a decade ago.
- Lack of safety buffer: The number of uninsured mortgages with amortization periods of more than 25 years is rising. Many homeowners are doing this to afford more expensive homes and support spending in other areas such as cars, technology and home furnishings. With low interest rates, the composition of mortgages has also changed to mean a higher principal amount. The FSR warns that these borrowers will take longer to pay back their home loans. Worse still, they will have less flexibility to extend their payments if they are faced with an emergency or have financial difficulties.
- Housing shock: Analysts are worried that Canadian homeowners and lending institutions are ill-equipped to deal with a housing shock. The equity buffer lenders’ gain when big down payments are made could erode if the house prices in major markets were to drop dramatically.
Reduce Risk with Advice from Trusted Mortgage Brokers in Canada
If you intend to purchase a home or an investment property, it is wise to speak with a trusted mortgage broker. We can advise you on how to protect the biggest investments you will make in your lifetime. Our team of mortgage professionals will get to know your housing and financial goals to guide you towards profitable decisions.
You can talk to our trusted second mortgage brokers to help you lower your risk. Call the experts at Accumetrix Mortgage Alliance today at 905-780-0908.