BOC warns of economic shocks due to mortgage stress


#realestate #mortgage

The Bank of Canada said on Thursday that high household indebtedness and imbalances in the housing market have intensified in the last year, leaving the economy more vulnerable to economic shocks.

In its latest financial system review, the Bank of Canada said many households have taken on large mortgages compared with their income, limiting their flexibility to deal with an unforeseen financial shock like the loss of a job.

Total household debt has increased by four percent since the start of the pandemic, picking up sharply since the middle of last year as the housing market started to heat up. The percentage of costly loans, defined by the bank as those more than 4.5-times a household’s income, have also risen above the peaks seen five years ago when policy-makers tightened mortgage rules.

The bank’s report said that the activity in the housing market and troubling figures on mortgages is reminiscent of 2016 just before stress tests were brought in on mortgage applications to make sure buyers could handle payments if interest rates rose.

The Office of the Superintendent of Financial Institutions said Thursday that effective June 1, the qualifying rate on uninsured mortgages would be set at either two percentage points above the contract rate, or 5.25 percent, whichever is greater.

The share of newly issued mortgages with a loan-to-income ratio above 450 per cent rose substantially in the second half of 2020 and account for 22 per cent of all new mortgages. That is above the range seen in 2016-17, before Canada’s financial regulator introduced mortgage stress tests intended to cut out risky lending.


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