Tal: Fear not, finance minister?

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The federal government’s concerns about Canadian household consumption run amok may be much ado about nothing, with a leading economist identifying a newfound focus on paying down mortgages.

"Canadian households did not only resist the temptation of low rates, they used those low rates to pay down debt at a pace not seen before," says Benjamin Tal, deputy chief economist for CIBC. "Despite a lethargic labour market and an unemployment rate that is still too high for the Bank of Canada's liking, debt service performance in Canada has almost never been better."

Indeed, instead of spending their disposable income, Canadians are making sacrifices, choosing to make extra payments on their mortgage to get out of debt faster, according to CIBC’s new market report.

The analysis jives with broker observations, which ultimately makes Canada's mortgage market more stable because in the event of a rate hike, homeowners would simply return to their regular amortization period, he says.

"Canadian households are paying back an additional $11 billion a year in principal that's not being officially recognized," says Mr. Tal. "That extra cushion is sufficient to absorb the first 100 basis point increase in the effective mortgage rate, with households simply re-amortizing to offset the payment increase."

The report finds that the debt-service ratio in the Canadian mortgage market - the cost of carrying a mortgage as a share of disposable income - at the aggregate level is 7.3 per cent, a full percentage point higher than the current 6.3 per cent officially stated by the Bank of Canada.

Even in high ratio mortgages, the risk of default appears slim, says Mr. Tal. High ratio mortgages based on their loan-to-value (LTV) position reveals that very little has changed over the past few years, with the share of mortgages with LTV larger than 80 per cent in fact falling by five percentage points since 2009, he says. As well, the percentage of households allocating more than 40 per cent of their income to debt financing has remained relatively unchanged at just over 6 per cent since the 2008. 

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