Mortgage stress tests may have a larger impact on Canadian real estate than most expect. Numbers from the Office of the Superintendent of Financial Institutions (OSFI) show that the Big Six banks had a major decline in the number of insured mortgages in September. While those declined, the amount of uninsured mortgage debt has experienced explosive growth.
Insured Vs. Uninsured Mortgages
An insured mortgage is where the lender has protection from a borrower defaulting. This kind of insurance is a rule for high ratio mortgages, where there’s a downpayment of less than 20%. Even though the borrower pays for the insurance, it covers the lender’s losses – not the homeowner.
Last year it became mandatory for insured borrowers to undergo a “stress test.” The test makes sure that payments are still possible if the mortgage rate rises up to 2%. Uninsured mortgages will receive a similar test in the new year, but they don’t undergo them right now. Since insured mortgages were hit with a stress test, uninsured debt has been experiencing explosive growth at the Big Six.
Big Six Banks See Total Mortgages Rise By Over 5%
First, let’s go over the total balance of mortgages at the Big Six, which showed modest growth. At the end of September 2017, the Big Six banks held $1.119 trillion in mortgage debt, up 5.37% from the year before. This represents 74.27% of the Bank of Canada’s total outstanding mortgage debt, flat from the year before. How this debt has changed over the past year is the interesting part.
September 2017. Source: OSFI, Better Dwelling.
Insured Mortgages Slip At The Big Six
Insured mortgages, which now require a stress test as of last year, showed a modest decline. The total of insured mortgage debt at the Big Six was $508 billion, a 6.24% decline from the same month last year. The largest decline was at the Canadian Imperial Bank of Commerce (CIBC), which saw a 9.61% decline to $90 billion. Royal Bank of Canada was impacted the least, with insured mortgages at $113 billion, virtually flat from last year. Mandatory stress testing likely played a large part in this decline.
Taken at month end of September 2016 vs 2017. Source: OSFI, Better Dwelling.
Uninsured Mortgages Experience Explosive Growth
Uninsured mortgages at the Big Six experienced huge growth over the past year. The total of uninsured mortgages stood at $611 billion in September, a 17.46% increase compared to last year. CIBC, which was the biggest loser of insured mortgages, was the biggest gainer of uninsured mortgages. The bank had $115.7 billion of uninsured mortgages at the end of September, a 34.85% increase from last year. The slowest growth was at the Bank of Montreal (BMO), where uninsured mortgages stood at $60.9 billion. That represents a 10.54% increase, which is still huge – just below the average.
Taken at month end of September 2016 vs 2017. Source: OSFI, Better Dwelling.
The insured mortgage stress test may have shifted people towards uninsured mortgages. This could have been a disaster for bank revenues, if they didn’t make such huge gains in the uninsured sector. Will the new uninsured stress test coming to Canada in January kill off the last sector of growth for the Big Six? Leave your thoughts below.
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The shift from high ratio to low ratio mortgages makes question whether people always had the 20% down payment and opted to invest it rather than put into the home due to low interest rates, and greater gains in the TSX etc. OR, whether people don’t have the 20% down payment but are now borrowing that from the unregulated (shadow) sector to avoid the stress testing.
Indeed I wish I could find out. I have a line of credit completely undrawn right now. Is that a “down payment in disguise”? Commnce giggles.
Lets not forget the generational element. Many families are passing wealth by drawing down a parental HELOC (leveraging an often ‘bought and paid for’ home) against an investment in their children’s homes.
In essence another version of a ‘shadow lender’. Buyers borrowing against their inheritance.
Wonder who has the biggest HELOC portfolio?
It would be nice to put those numbers for each bank against the Assets under Administration to find out which bank is the most exposed?!
[…] Big Six banks. Meanwhile, debt coming from uninsured mortgages has significantly increased, with Better Dwelling claiming that mortgage stress tests have played a major role in this shift. […]