Canadian Mortgage Approvals For “Over-leveraged” Borrowers Soars To A Record High

Canada’s banking regulator is seeing a spike in highly indebted mortgage borrowers. The Office of the Superintendent of Financial Institutions (OSFI) observed renewed growth in the exposure of mortgages to “over-leveraged” households in Q4 2020. Low interest rates are fueling rapid growth in borrowing — for both quantity and size. The share of mortgages going to over-leveraged borrowers blew past the pre-B-20 highs. It now sits at the highest share of originations on record.

How Much Is Over-leveraged?

OSFI uses the loan-to-income (LTI) ratio to determine segments of indebtedness. If a borrower has a mortgage LTI of 450% or more, they’re “highly indebted” or “over-leveraged.” This means their mortgage debt is at least 4.5 times the borrowers income. Ideally, the ratio of these borrowers falls, lowering risk.

When this ratio rises, risk increases, setting off regulatory radars. High levels often precede overly easy lending, which can become a problem. When regulators call it out, it often precedes new regulations to lower debt — like it did in 2017.

Over-leveraged Borrowers Represent A Record Amount of Leverage

OSFI mortgage lenders are seeing a record share of originations go to borrowers with LTI of 450% or more. These highly indebted borrowers represented 22.68% of originations in Q4 2020. The share of the market in that quarter was 5.19 points higher than just a year before. This is a very quick rise, which B-20 Guidelines had reigned in a few years prior. That’s a fast deterioration, rendering the impact of previous cooling measures obsolete.

Canadian Uninsured Mortgage Originations To Highly Indebted Borrowers

The percent of uninsured mortgages at OSFI regulated lenders, to borrowers with a loan to income ratio higher than 450 per cent.
Source: OSFI, Better Dwelling.

If this sounds foreign to you, B-20 Guidelines are what created the uninsured “stress test.” OSFI required banks to test borrowers for the ability to pay bills at higher interest rates. Almost immediately after rolling out the guidelines, highly indebted borrowers dropped off dramatically.

As we mentioned before, this trend had been reversing before the pandemic. The ratio increasing is a typical part of normalization, after a policy shock. Cheap credit from the pandemic accelerated the growth trend though, pushing it past the previous level of concern. Complicating the issue further, is the fact mortgage volumes today are also likely much higher than they were a few years ago. 

On a positive note, or less negative — the debt servicing of these borrowers improved. Over-leveraged borrowers had an average total debt service ratio (TDS) of 43.57% in Q4 2020. This is down from the recent peak average TDS of 45.99% in Q1 2019. Historically low rates are behind the trend, likely making it temporary. When rates rise again, servicing costs are likely to push higher as well.

The regulator has said they’re watching the situation, and plan on acting as needed. Considering even banks are now asking for market cooling measures, that may be soon.

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  • Kate 3 years ago

    I am sure this will not end well.

  • Bob Walter 3 years ago

    I would love to be that guy with the rubber stamp at the bank. Stamping APPROVED! on everything.
    That would be one great job.

    • Sam 3 years ago

      Need a mortgage but have low income and high debt? Wondering if you qualify? Try this simple home test. Take fingers. Place on wrist. If you feel a pulse….CONGRATULATIONS! You qualify for a mortgage 4x your annual income!

  • Ashley 3 years ago

    Heard a new gig in the mortgage industry – people who can’t afford houses based on their income, they are advised to reflect in their mortgage applications that they would use basement for rent. Suddenly they become eligible for the mortgage as rent is added to their income. Hurray everyone wins.

    • M.Bury 3 years ago

      Haha, not new at all. We were doing that in the 90’s. But your point is right on.

  • World Class 3 years ago

    IDK at this point I am at a loss to explain the gravity defying nature of Canadian home prices and Toronto/Vancouver in general. Since we left Canada for the US 15 years ago there has been an impending bursting in the real estate bubble and it has never happened. In fact, prices just seem to hit rapid acceleration. I have seen the narrative shift from its foreign buyers, to its lot’s of rich people live in Toronto and Vancouver, to mortgage rates at a record low.

    I firmly believe it is policy now at this point that the Canadian government will not allow house prices to fall. They are sending every signal that they worship at the altar of residential real estate and that the only ways to make money are – buy a home and then leverage your rapidly increasing equity to buy a condo and keep the ladder going. With 70% of Canadians home owners who is going to vote a against a government that has made the biggest part of their net worth sky rocket? This improves your consumer confidence and makes you more likely to splurge on new cars, a pool, etc and keep the consumer economy rolling. The policy changes implemented in Canada have taken all the risk out of system – the banks don’t carry it on their balance sheets, the CMHC guarantees everything. Without risk, it is impossible to argue that this is the lowest risk way to make money. Why would I take a chance on building a business when real estate is essentially risk-free?

    I have never seen a market that is so speculative that house prices hit records as rent is falling – this means people jumping into condos and house to rent are likely negative cap and are just banking on the infinite increase in prices. I hope the country regains its sanity and finds something more worthwhile to invest in than your primary dwelling and Air BNB units.

    It is disheartening to see a country that had a high quality of living and a high savings rate deteriorate into speculative mania on real estate while sending smug comments about the US and its epic collapse and how Canada is different because it has 2 world class cities.

    • Average Man 3 years ago

      I’m not sure which epic collapse you’re referring to, but if it’s 2007/8, I WISH we’d had that epic collapse. If people had taken a kick in the teeth back then, they wouldn’t be being so goddamned stupid now.

      • Sam 3 years ago

        As soon as this Pandemic hit I let out a loud “Censored”!! I’m not a conspiracy nut…but I almost was ready to go off. How convenient….just when Canadian Housing (or non USA housing across the world) was about to finally undergo some type of correction, governments now had an excuse to bail them out…..sure enough here in Canada….billions pumped into the mortgage industry….

    • Mike 3 years ago

      Nailed it.
      All at the expense of the low income workers that can never get in the housing market, can’t get anything from savings and other investment.
      Buy a barrack sit on it for as long as you can and be a millionaire.
      Work every day of your life only to die penniless.
      This is “bullshit” capitalism invented by soulless financiers and spineless politicians.

    • Doomcouver 3 years ago

      You have too much faith in the Canadian government to keep the market from crashing. Rates are at the zero bound, and the prices have never been more detached from fundamentals than right now. Literally the only way to stop a massive correction is to hyperinflate the dollar, and the BoC is extremely unlikely to let that happen.

      • Mikhael 3 years ago

        The crash will come sooner than most expect. There is no way we are still in near zero interest rates territory in even three years. But that’s besides the point. The dynamite is the percent of highly levered debt. The spark is the impending inflation. Does anyone believe we can print literally 20% of the GDP into existence and not see some inflation. Meanwhile, the cerveza sickness’ economic scarring still has the real economy in a stranglehold. Sooner than later serious staglation will be coming for the wide cross section of FOMO motivated, qualify with every last dollar of income debt owners. Commodity prices surging now – inflation could the water cooler talk by summer.
        That mortgage rates have started to decouple from the central bank interest rates, even if only slightly, is the inflection point that says this process is already now underway. Banks aren’t stupid – they know inflation is coming, if not already here. Hedge accordingly.

    • M.Bury 3 years ago

      This has happened before. Some of us here remember it well. Some of the policymakers remember it well, too.
      It will definitely end badly for many people, but only after most of the bears and nay-sayers have capitulated to the point that FOMO-driven greed kicks in causing them to buy at the exact wrong moment because their exhaustion will have tricked them into thinking “This Time Is Different”.

      • Ardently Curious 3 years ago

        Arent we already there?? I am a complete contrarian and I’m almost ready to throw in the towel. This has been going on for sooooooooooo long.

        • SnWestern 3 years ago

          Same here. Bearish for 8 years now and still seeing this story go on.

        • Mike from Canmore 3 years ago

          Same, here I’m thinking, well hell, it can’t go down, what’s a 2 million mortgage at this point. Even if it corrects, it will take it years to hit bottom.

        • Mike 3 years ago

          Also thinking the same thing. So much so, I started recently looking for cheap real estate in New brunswick just to get into the market and not miss out. I had to convince myself it was ok to miss all the gains. At least I’ll be able to sleep at night.

          • Mike 3 years ago

            By this post I mean leverage my Home in Ontario and start buying more.

  • Jimmy 3 years ago

    Well said.

  • a guy from Toronto 3 years ago

    I agree with you. I think that at this point the government will do whatever it takes to keep prices up. Even buying portion of the equity if needed.

    This is the only reason why I’m unsure about future trends. You cannot fight the government that has the printing machine.

    • Mikhael Horvat 3 years ago

      The government has less control than they would have us believe. All of this money printing is what is going to bring the real estate collapse about. Yes, hyperinflation would inflate everyone’s debt away but it is more likely that we see rampant, significant, and sustained, albeit ‘bounded’ inflation first, and it will be that which has lending rates rising, people underwater on mortgages, people defaulting on mortgages, and then kablooey. THAT is when you will want to make your real estate move: inflation, deflation (purchase!), hyperinflation.
      That said, if they introduce central bank digital currencies before inflation takes a grip (doesn’t look like it) then all bets are off. If the banksters attain a fully centrally panned economy – well then who cares if you own real estate – you won’t for long.

  • Joe B 3 years ago

    Nicely said World Class. It’s just staggering to see how much Canada is relying on real estate to prop up the economy and how obvious it is that the Feds refuse to acknowledge the mess that’s been created under their watch.

    • Doomcouver 3 years ago

      Yes this is the danger of allowing an intrinsically non-productive asset to power your economy through capital appreciation. Inevitably the price growth will hit a wall and can’t grow anymore, and the economy subsequently implodes spectacularly. It would be political suicide to intentionally pop the bubble at this point, no level of government will enact any tangible policies to do so.

  • Doomcouver 3 years ago

    Great article poking more holes in the false narrative that Canada doesn’t have a “sub-prime” loans problem. I’ve always maintained that the fact Canadian mortgages need to be renewed every 5 years, at whatever the going interest rate is, makes almost all mortgages what i’d call “potentially sub-prime”.

  • Ashley 3 years ago

    I wonder if there is ever going to be a movie/documentary, like the big short, on Canadian real estate. With income and home prices so detached there is a high likelihood of mortgage fraud.
    I can’t get my head around how come with $75k median household income in Ontario house prices average $1M. There’s got to be a weak link in the chain.

  • Contrarian 3 years ago

    Every institution or person connected with the Real Estate/Mortgage Industry except the Real Estate Agents are sounding alarm at the risk of the market. Why are the institutions who are responsible for the rules, regulations, and policies crying on media? God damn it! Do your job and do something to fix the market. Do not tell us that there is a problem. You were appointed to keep order and sanity to the mortgage market. Economist, Bank executives, politicians etc. blah, blah blah,!!!!!. We all know that easy money, cheap money, loose lending standards, false income reporting, FOMO are all the contribution factors making the housing market in a bubble situation. Finally, there is the Bank of Canada who is keeping interest rate low, buying mortgage backed securities, buying government bonds, quantitative easing and running the money printing presses 24/7. There is the CMHC which takes the risk on the backs of Canadians. Yes, we the citizens are all on the hook for all bad loans.

    • Sam 3 years ago

      This is the reason. Former BOC chief on today’s hot market.

      I’d like someone more intelligent in economics than myself to debate his assertion that propping the real estate market was a good “trade-off” to hold back a recession. Aren’t we just kicking the can down the river….and making it worse?

      • Deus Max 3 years ago

        Was not a good trade off in the long run but it worked for the boomers and those in charge until now.

        The Americans took the housing market tank to the face because they actually had other forces at play to absorb it and recover (tech, high value added services and production). We did not and do not. It’s a night and day comparison between the Americans and us frankly. They’re in a different world as far as I’m concerned.

        I think we will become an international laughing stock in the business community when (if?) this bubble pops in all honesty.

      • Ashley 3 years ago

        Mr. Poloz should have looked at south of the border before making this policy decision, what caused recession in US – housing, and BoC governor decided that Canada should use housing to save itself from recession. This is like putting out fire by pouring oil on it.
        Good that he is not a governor anymore but replacement is not any worth either.

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