CAAMP says mortgage fears are exaggerated

CAAMP says mortgage fears are exaggerated

A new study released by CAAMP concludes that very few Canadians face unaffordable increases in mortgage costs and Canadian lending criteria are already tight.
The report entitled, “Revisiting the Canadian Mortgage Market – The Risk is Minimal” states that “lenders and borrowers have been highly prudent in the mortgage market … and a vast majority of borrowers have left themselves considerable room to absorb increases in interest rates.”
The study said 79 per cent of mortgages are fixed rate and mostly for terms of five years or longer, leaving 21 per cent of borrowers with variable rates and more exposure to changes in interest rates. The study was based on about 59,000 mortgage loans (excluding renewals or refinances of existing mortgages) totaling just under $16 billion, which were funded during 2010, which represents about one-quarter of the total mortgage activity.
The study reported that the average gross debt service (GDS) ratio was 19.6 per cent, well below typical lender standards of 32 or 35 per cent used to qualify borrowers. The average total debt service (TDS) was 28.9 per cent, still well below the 45 per cent lender standard.
For fixed rate mortgages the GDS was 22. 5 per cent and the TDS was 32.5 per cent.
According to the report a 2.5 per cent rise in interest rates for variable mortgages would see the average GDS would increase to 24.6 per cent and the average TDS would increase to 33.7 per cent. CAAMP’s research indicates that of the mortgages funded in 2010, only 800 to 950 would exceed the 45 per cent TDS ratio.
For fixed rate mortgages, a one per cent increase in interest rates would increase the average GDS to 22.5 per cent and the average TDS to 32.5 per cent and less than one per cent (1,000 to 1,350) would have TDS ratios of more than 45 per cent.
The Association also found that among the high ratio loans approved in 2010 – with the reduced amortization period (30 years versus the prior 35 year limit), a small minority (about 2 per cent) would have TDS ratios above 45 per cent and those loans would probably not qualify. Some of those consumers would still be able to buy, by buying lower priced homes.
The report cited job loss or reduced income as the main reason for mortgage defaults, saying that “Unaffordable premium increases are a negligible risk factor at present and in the near-to-medium term future.”

A third cause is unaffordable increases in mortgage payments, something that caused difficulty in the U.S. as low introductory rates were replaced by market rates and payments that rose substantially. Stated the report “But this third category of risk is the source of recent concerns about future threats. This study concludes that very few Canadians face unaffordable increases in mortgage costs.”

To read the full report:

  • Whatever 2011-01-21 4:47:43 AM
    There you go Mr.Carney, green light to increase interest rates - nothing to worry about according to CAAMP! Same with you Mr.Flaherty... please be more bold next time - I dare you to reduce the max term to 25 years and simultaneously increase the min downpayment to at least 10%. All is well in bubble land, nothing to worry about - CAAMP says so!
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  • Brad Balmer 2011-01-21 10:55:25 AM
    On the surface, it appears to me that the study's conclusions are based entirely on what may happen in the short term and only then without factoring in what consumers debt may grow additionally between now and then. What is the time frame this study looked at anyhow?

    I haven't read the study so I don't know if there is any support provided to justify the projected rate increases referred to and the projected timing of those increases. There is also no mention in the article at least, about what interest rate increases for other consumer debt facilities are projected at and the impact there.

    Flaherty et al are charged with the responsibility to address the longer term challenges Canadians may face. I don't think I'm alone in thinking that the approaches Flaherty has taken (after getting buy in from the lenders) with respect to mortgages are well thought out and good for Canadians now, and down the line. These moves he's making, in part, also have a lot to do with helping to address his concerns around a projected underfunded CPP that we'll face long after he's out of office and collecting his MPP.
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  • Vancouver Broker 2011-01-21 11:39:16 AM
    The real issue here in my opinion is that no matter how prudently the lenders are required to lend their mortgage money, the same client can turn around and get 50k in credit cards and finance a vehicle afterwards without regard to affordability. So my mortgage ratios might be perfect, and the client can easily afford their payment, and still find themselves in financial difficulty.

    The only thing Flaherty accomplished here is forced new buyers to pay more for the same mortgage - credit card offers will still come in the mail and tempt the consumer with 18% easy money.

    I think the major point of the study is to re-inforce the ideae that the vast majority of mortgage defaults in Canada are/will be due to 'life events' such as loss of job or whatever, and not rising interest rates.

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