Debt fears overblown, says mortgage industry

Faced with new rules from Ottawa, the Canadian mortgage industry has struck back with a report it says shows that Canadians continue to be “highly prudent” when it comes to their loans.

The Canadian Association of Accredited Mortgage Professionals said its data shows the vast majority of borrowers have left themselves plenty of room to absorb any interest rate shocks and it wondered about the need for new rules.

“While it will be useful to discuss the appropriateness of current lending criteria, the discussion should not be focused solely on whether to tighten; the possibility of moderating the criteria should also be on the table,” the report stated.

For the second time in nine months, the federal government made it tougher for Canadians to borrow Monday. The latest changes lowered amortization lengths from 35 years to 30 years, reduced refinancing limits to 85% of a home’s value from 90% and removed government insurance on home equity lines of credit.

CAAMP president Jim Murphy said he was pleased the new measures did not increase the minimum down payment required on a home, but wondered if the new rules went too far.

“Rather than reducing the amortization period to 30 years from 35, as the Minister has announced, we would have preferred that the government had required those people seeking 35 year amortizations to meet the same qualifying standards as those with a shorter amortization. We hope the government will revisit this one feature as the economy strengthens,” said Mr. Murphy.

CAAMP said 79% of mortgages in Canada have fixed rates and most of them are locked in for terms longer than five years, meaning only 21% of people with mortgages are vulnerable to a spike in rates.

In its report the group noted the average gross debt service ratio was 19.6%, well below the 32% to 35% demanded by lenders. The ratio is derived by taking mortgage payments and property taxes and dividing by household income. It says if rates went up by one percentage point, gross debt service ratios would only rise to 24.6%.

It also says the average total debt service, which includes all debt payments divided by household income, was only 28,9% for variable rate holders, below the 45% demanded by banks. CAAMP says if rates go up one percentage point the ratio would increase to 33.7% on average, but only about 800 to 950 mortgages funded last year would fail to qualify under the higher rate.

The group says the biggest risk to the Canadian mortgage market is job loss and maintains even before the latest changes an argument could be made that mortgage criteria in Canada is too tight.

“Given the changed lending rules, housing demand at present and for the future is probably lower than it needs to be,” the report concluded.

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