The Risk Of Uninsured Mortgages In Canadian Housing
The federal government in attempt to cool off the hot housing market, limited the access to insurance mortgage.
Though it seemed like a sensible step at first, because insurance mortgage is important for all mortgages; where the buyer puts less than 20 per cent of the purchase price down, however it had unintended implications as it only partially worked. Currently, the number of new high-ratio mortgages has gone down drastically.
Bank of Canada says uninsured mortgages pose an increasing risk.
Federal authorities prohibited access to insurance mortgage on homes worth more than $1-million.
Most Canadians are currently ignoring mortgage insurance completely. This is a big risk for borrowers and lenders. Buyers are settling for larger down payments on expensive homes while lenders on the other hand, are more exposed due to the fast increasing share of their uninsured mortgage portfolios.
This increasing share of new mortgage lending is for low-ratio mortgages, because many homes in both Toronto and Vancouver are selling out for more than $1-million and don’t qualify for insurance; according to the Bank of Canada’s recent Financial System Review.
The Bank of Canada admits that “The changes to mortgage insurance rules and an increase in mortgage insurance premiums may have encouraged some borrowers to increase their down payment to access a low-ratio mortgage.”
The result of this is that the housing markets in both Toronto and Vancouver have remained hot despite the new mortgage rules.
According to Bank of Canada, almost half of Canada’s $1.5-trillion mortgage market – 46 per cent is now comprised of uninsured loans. More than 80 per cent of new mortgages issued by the Big Six Banks in Toronto and Vancouver don’t require insurance because they are low-ratio loans.
Bank of Canada senior deputy governor Carolyn Wilkins told reporters that it’s not clear where Canadians get the money to put up the larger down payments. If buyers are taking out secondary loans from unregulated financial institutions, they may be putting both themselves and the financial system at risk.
What most Canadians really care about is their monthly mortgage payments. They are going into more debt just to buy more expensive homes. This has been offset by drastic lower interest rates. The result of this is that the total costs for debt-service have hardly changed however the composition of the mortgages has changed.
Mr. Kronick, an analyst, recently reported that the total debt burden has gradually moved from interest costs to principal costs. “Households are more leveraged and more vulnerable, with principal making up a larger share of monthly housing payments,” he stated.
He is concerned that Canadians may be unprepared for a real estate housing shock due to their spending on other areas, technology, home furniture, cars, etc. while their housing debt keeps piling up. He added that; people are spending their accumulated housing wealth and depriving themselves of a “buffer” if house prices fall.
The whole point is that the federal government’s attempts and efforts to limit mortgage insurance by discouraging risky borrowing are simply, half-measures. It may even be the main reason why some Canadians are doing the wrong thing.
