/Mortgage stress tests may be driving riskier homebuyers to borrow from private lenders

Mortgage stress tests may be driving riskier homebuyers to borrow from private lenders

Canada’s housing market cooled during the year’s first half after rising interest rates and efforts to weed out risky buyers took their toll, according to the country’s largest public mortgage provider.

Housing market sales financed through Canada’s banks — which account for three quarters of the market — slipped to $60.3 billion for the first six months of the year compared with $64.9 billion during the same period last year, Canadian Mortgage and Housing Corporation said in a statement Wednesday.

Same bank mortgage renewals dropped to $86.2 billion during the first half of this year from $94.7 billion during the same 2018 period, while same bank refinancing fell to $30.1 billion in 2019’s first six months from $35.3 billion in the year-ago period, CMHC reported.

Several factors have combined to cool the country’s overheated property markets. Canada’s benchmark interest rate rose five times since 2017 and now sits parked at 1.75 per cent. Regulators introduced tougher mortgage rules last year called stress tests and added foreign ownership stipulations to thwart rampant price increases in areas such as Vancouver and Toronto.

“We believe the market is not growing as fast,” Carlos Mandujano, a senior analyst at CMHC in Ottawa, said by phone. “We’ve seen the stress tests impacting volumes and there’s been an increase in interest rates which is also impacting the number of households that are receiving mortgages.”

CMHC also found that financial stability is improving nationally due to low levels of default combining with the mortgage market’s slow growth. The stress tests have decreased likelihoods of mortgage defaults because loans are harder to get in the first place, Mandujano said.

We believe the market is not growing as fast

Carlos Mandujano, senior analyst, CMHC

“The Canadian bond yield is an indicator of how high, how low mortgage rates will be. So here the message is that long-term funding costs are decreasing and this is causing fixed rates to be low.”

“Right now it would be an incentive to choose a fixed mortgage rate,” Mandujano said.

Still, the drop of Canadian five-year bond rates to 2014 levels of less than 2 per cent could “re-incentivize mortgage credit growth in 2020,” CMHC said.

While CMHC said just 1 per cent of the house-buying market secures loans from mortgage investment corporations and private lenders, the higher stress tests may be driving interest in that route among riskier buyers. The corporations have increased lending by about 10 per cent to $13 billion while the rest of the mortgage sector has risen just 2 per cent, CMHC said.

Meantime, 14 per cent of mortgages are acquired through credit unions, and 6 per cent via mortgage finance companies, according to CMHC.

Delinquency rates at mortgage investment companies and private lenders were highest at 1.92 per cent, compared to 0.23 per cent for the big banks and 0.16 per cent for credit unions.

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