Canada

Mortgages To Highly Indebted Borrowers Rises To The Highest Level Since B-20

Canada is seeing a rise in highly indebted, and over-leveraged mortgage borrowers again. Office of the Superintendent of Financial Institutions (OSFI) data shows a rise in relatively large loans, when compared to borrower income, in Q4 2019. The increase has been rising over the past two years, and now represents the largest segment in the market since prior to B-20 Guidelines add the stress test.

B-20 Guidelines

The B-20 Guidelines are measures taken to help manage uninsured mortgage risk. It lays out principals and procedures for OSFI regulated lenders, to ensure borrows can pay. The most notable of the measures is the “stress test,” which checks if they could pay a higher interest rate. The Guideline, in particular the stress test, improved loan quality.

One measure of improvement is a decline in the number of highly indebted borrowers. This is observed in the loan-to-income (LTI) ratio of new uninsured mortgages. New uninsured mortgages with an LTI ratio higher than 450%, declined substantially. Which means the number of people borrowing more than 4x their income dropped by a lot. Important, because it means more borrowers are able to manage risk, without intervention.

Mortgages To Highly Indebted Borrowers Back On The Rise

The impact of B-20 Guidelines is starting to fade, as borrowers return to scooping up more debt. About 17.5% of mortgages in Q4 2019 went to people borrowing over 450% of their income. To contrast, this ratio was only 16.4% in Q3 2019, and just 14.1% during the same quarter a year before. OSFI regulated lenders are becoming more comfortable with lending higher ratios already.

Canadian Uninsured Mortgage Loan-To-Income Ratio

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.

The ratio of mortgages going to these highly indebted borrowers is the highest in years. The recent quarter is the most since Q4 2017 – the last quarter prior to stress testing. It’s not quite at the peak record of 20.0% in Q3 2017, but it has been rising. It’s actually back to a similar level seen in 2016.

Approvals of over-leveraged, uninsured borrowers is once again on the rise. These borrowers pass the more stringent buying guidelines. They are technically better than the same segment of buyers prior to B-20 updates. However, they are still exposed to significant vulnerability, in the event of a price correction. OSFI has stated that this is an area they are monitoring closely.

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20 Comments

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  • Holton 2 months ago

    We all know whats needed to be done, put taxation on all none primary residence. All foreign owned real estate, all non resident Canadians owned real estate. All corporate owned residential real estate.

    Under the Liberals housing have become unaffordable for young families. They have the tools and they are not addressing the problem.

    • Trader Jim 2 months ago

      Fair, but none of the parties were seeking to address housing issues in a logical, and sustainable way.

      All parties suggested injecting more capital into the market, which as we know with any other commodity, increases prices. It doesn’t help with affordability.

      • Holton 2 months ago

        Putting high taxation on speculators and hoarders solved both the housing crisis and revenue problem.

        Two birds with one stone, Liberals political legacy of unaffordability is an ugly one. But I dont think they have the seats / brain / balls to do it. So we are all screwed, this is the biggest bubble in Canadian history and the business cycle is coming to an end.

        • MP 2 months ago

          Could you please be a bit more specific? Which housing crisis was ‘solved’ by increased taxation? What exactly is the ‘revenue problem’? Do you mean the affordability issues (which would be corrected via home pricing put back in to CPI)?

    • Matthew P Smith 2 months ago

      So…while 450% seems like a big number, it’s a perfectly normal number.

      Income: $100,000
      Home: 450,000
      Typical in any generation dating back to the 50’s. But yep…that’s 450% loan to income.

      The Year: 1958

      The Buyers: Ron and Joan. Ron was a police cadet and Joan was awaiting their first arrival. Both were in their early 20’s.

      The Buy: 2 Story Semi-Detached Home on Chelwood Rd., located at Birchmount and Eglinton.

      The Numbers: Purchase Price –$16,900

      Their down payment was $1500, $500 saved and $1,000 from inheritance. Ron brought home $3,500 a year as a police cadet and, at $75/month for the mortgage and a few lump sum payments, they paid off their home in 15 years.

    • MP 2 months ago

      Taxation is not the solution when the issue is price inflation.

      Residential real estate has been treated as an investment and removed from CPI since the ’80s, however it is allowed to be sold and marketed without the same regulations placed on all other investment vehicles. If res RE is an investment then it needs to be treated in the same way as all other securities.

      Or, just put it back the way it was before the ’80s and include home prices in inflation, thus impacting interest and the amount people can borrow – preventing over speculation by under educated people on highly leveraged investments (people freak out about 3x leverage ETFs, but a house bout at 4,5 or 6 to 1 is okay??).

      • straw walker 2 months ago

        LTI levels in Vancouver are a lot higher than 4.5 times , in most districts it run from 8.5 to close to 12.
        The question keeps coming back to , where is the money coming from??

        • MP 2 months ago

          It comes from the banks. With low interest rates, money is cheap and people end up borrowing more than they responsibly should.

          Hence, if home prices are built back in to CPI, money will become less cheap if home prices increase too quickly, and peoples borrowing habits will be managed by market forces.

      • Hippo 2 months ago

        A lot of people don’t seem to understand this, new taxes won’t help affordability or wealth for anyone who isn’t already wealthy and can take advantage of wealth based tax breaks.

        A lot of people assume that a generational windfall is coming to fix things and overspend now waiting for that payday, but they have no clue what they are actually going to get.

        Many young to even middle aged people I know seem to think they will get a sudden windfall of inheritance but even that, unless properly sheltered will never happen. The numbers say that 84% of people will see no significant inheritance at all.

        Let us take an extreme example of parents who say have a net work, including house but excluding furniture and other assets of around $2,000,000 half in house and half in RRSP or other tax protected investments and two children in Canada.

        Assume each parent follows the average and needs around 2 years of end of life care in a care home. Because of their net worth, they won’t get any subsides, at todays prices that would be around $3,700 a month in Vancouver, per person. a total cost of $180,000. With the cost of removing that money from RRSPs we are now looking at $240,000.

        Seems good but what about the 5 years before that when they are likely to need in home care assistance. That is $1,485 per month for a couple, but let us assume they both degrade at the same rate to simplify it otherwise it would be close to $1000 per person. That would be another $89,000 but again after taking that money out of savings it would cost $120,000.

        This all simply assumes that they don’t have long and lengthy illnesses and don’t need special treatments not covered by provincial healthcare. An honestly given that I had to deal with this recently the prices quoted are generously low from https://www.comfortlife.ca/retirement-community-resources/retirement-costs-british-columbia

        So now between those two costs that $2,000,000 estate is now worth roughly 1,640,000.

        Ok, First death time, let say both die in different tax years, which would be the norm. If the man dies first and given it’s the boomer generation or before, then we are likely to see the RRSP all within his name. Most of it transfer over with minimal fees except pension and RRSP. This gets more complicated but could result in a tax burden of 25% of the remaining RRSPs. That could be as much as $160,000 if it wasn’t set up well to begin with as a join account but let us assume that isn’t the case and assume a reasonably cheap funeral and all expenses to transfer ownership can be done for around $10,000.

        Now the second death occurs. Now there is no more protection, after another $10,000 in funeral costs, the whole estate will be taxes at 25%, a cost of $405,000. Then you need to selll the house, guess what, unless you have been living in the house for years, it’s non primary for the beneficiaries so full 15% of that will go to capital gains tax that’s another $150,000 plus $50,000 in closing costs and real estate agent fees. So About $1,015,000 left to split right?

        Unfortunately, your parents deferred the outrageously expensive $10,000 per year in property taxes since they turned 65. Now having died at 84, you need to pay those back upon sale. Another $192,000 gone, stupid 1% interest charges.

        This leaves us with around $412,000 per sibling. Not even close to enough to by a teardown in Vancouver.

        Still not bad right, try running those same numbers but make the house only worth say a Calgary prices of $400,000 or maybe the don’t have retirement savings at all and are living on OAS. In those cases good luck even getting anything. Most parents don’t even have that kind of wealth hidden away so the results will be much worse, most studies indicate that 84% of us who are waiting on inheritance will see less than $10,000.

    • Al 2 months ago

      Most investment properties are owned by Canadians… in Toronto and Vancouver probably less so than investment properties in Say, Milton, Georgetown, Oshawa or Pickering but all the same.
      Every landlord I ever rented from was Canadian, and if they had immigrated, they immigrated in the 60s..
      Many of my friends, coworkers own rental condos in Toronto, and they were all born here, save for one fellow who was originally from Egypt, but he’s been in Canada for decades?

    • Hippo 2 months ago

      You want to punish the poor. Most homes are primary residence, any non primary is likely being rented, putting a tax on non primary will simply raise rent costs as someone who is renting out a home isn’t in the business of losing money.

      Since the poorest part of the population has the highest rate of renting, taxing non primary residences will only have the result in harming the poor at a disproportionately higher rate and make it more difficult for them to move into home ownership.

  • Trader Jim 2 months ago

    No crash, no perceived risk. Now the whole country thinks prices go up forever. haha

  • Dave 2 months ago

    B-20 was a waste of a policy in the first place. It didn’t stop people looking for high risk loans, it only sent them outside of OSFI and to private lenders.

    • Tom Wolfe 2 months ago

      I agree Dave, but there was/is no alternative if you want to own a home.

      The choices seem to be –
      1 – add a zero to your income (before close).
      2 – remove a zero from your purchase price.
      3 – opt out until things change.
      4 – cross your fingers and fake it ’til you make it.

      Options 1 and 4 are closely related, and is the silent-train wreck piling up around us currently.
      Option 2 and 3 are directly related, and possibly the smartest plan given the inevitability of 1 and 4.

      • Holton 2 months ago

        Tom good reply, however it would be better if you rearranged the order lol.

      • Average Man 2 months ago

        I know Reddit isn’t a great cross-section of humanity, but the number of people on r/PersonalFinanaceCanada who are either copping to straight out lying on a mortgage application or, if they haven’t done it themselves, knowing someone who straight out lied on a mortgage application is worryingly high.

    • SH 2 months ago

      You seem not to understand the purpose of B20. It wasn’t necessarily to prevent subprime borrowers from somehow obtaining a mortgage. It was to mitigate risk to the banks AND the taxpayer via the publicly-funded CMHC. If subprime borrowers went to private lenders, that’s not a problem – that’s a private transaction and it leaves the taxpayer out of it.

      • Tom Wolfe 2 months ago

        SH – Mitigate risk while providing a usurious profit grab, because secondary lenders are sometimes owned by the big 5 banks.

        It’s a government sanctioned method to milk consumers trapped between artificially high prices and uncertain economic conditions. That housing (and gas prices) is not tied to inflation is suspect to say the least. People will figure it out when it’s too late.

        ‘Let the eat cake.’ MA famous last words.

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