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 ChangeThe 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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