Canada

Overleveraged Home Buyers Represent A Larger Share of Canada’s Mortgage Debt

Canadian mortgage borrowers are increasingly overleveraged, while better-positioned ones take a step back. Bank of Canada (BoC) data shows overleveraged borrowers represented a larger share of new mortgage debt in 2020. The rise came at the expense of those with better debt levels. That means there is a lot more risk entering the market, for the first time since the stress test was introduced. 

Overleveraged Home Buyers and Loan To Income (LTI) Ratios

Overleveraged can mean a lot of things, but the BoC and OSFI are using the loan-to-income (LTI) ratio. It’s exactly what it sounds like, the size of loan in contrast to the income a household makes. The higher the ratio, the more debt the household has relative to their income. If the ratio reached 450%, that means the debt is 4.5x income, and that borrower is considered overleveraged. Overleveraged borrowers are at a much higher risk of experiencing financial hardship.

Overleveraged Borrowers Represent A Larger Market Share

Last year, overleveraged borrowers represented a larger share of new mortgage debt. The share of new mortgage debt issued to those with an LTI ratio of 450 to 550 percent, increased by 3.66 points. Those with an LTI of 550 to 800 percent, captured another 2.88 points of market share as well. As the composition shifts more towards these borrowers, real estate becomes riskier.

Canadian New Mortgage Composition Change

The change in the share of new mortgage debt issued between 2019 and 2020, by the loan-to-income ratio of the borrower.
Source: Bank of Canada; Bank Filings; Better Dwelling.

There Are Fewer Buyers With Healthy Leverage Ratios

The increased share of overleveraged buyers came at the expense of healthy borrowers. Borrowers with an LTI between 350 and 450 percent lost 1.13 points of market share. Those with an LTI ratio of 350 percent or lower saw their share of new mortgage debt drop by 5.45 points. The market is increasingly being driven by riskier buyers.

Earlier this year, we took a dive into overleveraged mortgage borrowers. They’ve recently been representing a larger and larger share of the market. Today’s data gives some additional context to those numbers. The increase of riskier borrowers, came at the expense of much better-positioned ones.

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7 Comments

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  • Erik 4 months ago

    Nothing to worry about here folks.. no bubble yet. Although may be getting frothy ( whatever that means) Real estate is strong. Markets always continue to go up. As long as there is immigration, pent up demand, and casinos real estate is a smart buy. Especially since our markets are more expensive then LA or NYC…. Having $850000 debt in your primary home is good debt. Using leverage is the way towards wealth. Even if you can’t insure your home….

  • StupidCanadians 4 months ago

    Look at my name!!!

  • Avy 4 months ago

    I still don’t understand how people are buying up $2.5M+ houses where I stay in Toronto. Even with a good salary, I’ll probably never make that much in my entire life.

  • Dee 4 months ago

    Why on earth no one in the government is acting? The way I see it we are headed towards the paradox of thrift. Young people are saving for a massive down payment, no money spent in the economy, no more wages. This is not going to end well. We should follow New Zealand and try to get a handle on this problem

  • Mehdi 4 months ago

    What does the author mean by the concluding statement, i.e. the claim that “[t]he increase of riskier borrowers, came at the expense of much better-positioned ones” [I emphasize the word expense, in my question]? Pray tell.

  • Erik 4 months ago

    They bring higher risks to the market overall ie potential large correction

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