BoC: Uninsured mortgages heralding a new set of risks

Record debt levels and lopsided credit-to-income ratio will exacerbate these dangers, the Bank of Canada warns

BoC: Uninsured mortgages heralding a new set of risks
In its bi-annual Financial System Review, the Bank of Canada sounded the alarm on the steadily rising proportion (now at 46 per cent) of uninsured outstanding mortgages in Canada, saying that this is a recipe for potential future disaster.

The trend will compound the dangers presented by unprecedented debt levels and the faster rise of mortgage credit versus disposable income. In addition, the BoC pointed at emerging risks in the low-ratio mortgage segment, which has seen buyers putting over 30 per cent down on average.

Said developments might lead to equity buffers depleting rapidly in the worst-case scenario of drastic home prices declines. Other “riskier characteristics” emerging in this mortgage segment include borrowers seeking longer repayment terms.

“I think where we see the signs, in some parts of that market, are really with respect to an increasing share of those households who have loan-to-income ratios that are over 450 per cent,” BoC senior deputy governor Carolyn Wilkins stated in a press conference, as quoted by The Globe and Mail.

“We’ve seen that decline in the insured space, but in the uninsured space that’s gone in the opposite direction.”

Another concern is the source of down-payment money in the current fiscal environment.

“There’s signs that there’s some co-lending going on. If it’s what people have called ‘the bank of Mom and Dad,’ that’s kind of one thing,” Wilkins said. “If it’s drawing on lines of credit or other secondary loans, then of course that does change the financial profile of the borrower in a way that’s significant.”

The BoC’s review stated that while the bank has not yet offered an assessment of the uninsured mortgage sector’s riskiness pending updated 2017 data, “The overall trends of more issuance and riskier characteristics of uninsured mortgages are likely continuing in light of the ongoing strength in the hottest housing markets.”

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