Canadian’s holding insured mortgages (CMHC) exhibit low risk appetites

General Cameron Wilson 4 Dec

Great news, Canada!

The Canadian economy has and does enjoy a very profitable real estate and mortgage market, especially so in recent memory. There has also been discussion of “bubbles” in the market and the danger they pose to the Canadian economy with Canadian’s being overleveraged when looking at their incomes versus their monthly liabilities.  The debacle in 2008 in the United States saw a mortgage meltdown that was based on lenders providing mortgages to buyers who in many cases were unqualified, whether it was income, credit score, 100% mortgages or employment status.  Are we in Canada in a similar state where borrowers are taking on more than they can eat?

NO, NO and NO! According to the Canadian Mortgage and Housing Corporation, CMHC for short, we are doing just fine.  Let me show you the numbers and a provide a quick synopsis of what they mean.

CMHC, on November 29th released its Q3 2016 financial results and the numbers tell a very positive picture for the Canadian insured mortgage borrower. Let us keep perspective of what “Canadian CMHC insured borrower,” represents: a $514,000,000,000 or 514 billion dollar market. A huge portion of the Canadian economy.

Canadian’s on average may be over leveraged but it is not due to their mortgage and is more likely to be student debt, credit cards, loans, car purchases, and other consumer debts. Where can this be found in the CMHC Q3 release.  Well, with a 0.32% or a third of one percent arrears rate on CMHC loans that equates to 8,286 loans in Canada, we can conclude that there are currently 2,589,375 loans in Canada that account for the 514 billion dollars of mortgages under CMHC administration. We have total mortgages under CMHC administration of $514,000,000,000 that breakdown into 2,589,375 individual mortgages.  We can now discuss and analyze the individual borrower and assess their ability to withstand disaster in the market.

The Averages:

Loan Size: $198,503.50 (max. $266,193.19 if extended to max GDS of 39%)

Credit Score: 751

Gross Debt Servicing (GDS): 25.7% (max. 39% for qualification purposes)

Equity in home: 34.8%

These numbers represent security from rate fluctuations and property devaluations. Let me explain.  A borrower who has earned a 751 credit score shows responsibility in payment history and proper debt management, which is a good start.  More importantly though, these statistics show that the average CMCH borrower would be able to withstand a significant rate increase of up to double their interest rate. I do not have the exact figure on the average interest rate a CMHC borrower has but because of the 751 credit score, it is likely they are qualifying for prime rates.  Let us assume a rate of 2.85% on a 5yr term for a 25 year amortization.

Doubling of the Rate: 2.85% to 5.7%

Average loan amount: $198,503.5  Payment @ 2.85%: $924/m with GDS of 25.7%

In Canada to qualify for a CMHC backed mortgage you must have less than 39% GDS, we have seen an average of 25.7 but how much of a loan could the unique CMHC mortgage borrower qualify for at 39%? Going from 25.7% to 39% represents an increase of 34.1% and the new loan amount would be $266,193.19.

Max loan amount with current debt vs income: $266,193.19  Payment @ 2.85%: $1,239/m with GDS of 39%

So in terms of affordability the maximum payment for the average borrower would be $1,239 per month regardless of interest rate but based on a 5 yr. term and 25 yr. amortization. 

If interest rates doubled for the average borrower, many would say the end in nigh but not so fast, let’s see what the numbers say.

Average loan amount: $198,503.5  Payment @ 2.85%: $924/m with GDS of 25.7%

Average loan amount: $198,503.5  Payment @ 5.7%: $1,235/m with GDS of 25.7%

As the above example shows with a doubling of interest rate, however very unlikely that is to happen, our average CMHC borrower will still not have breached the 39% GDS or max payment of $1,239/m, great news for our country and people as we can sustain dramatic turns in the market and still have our financial security protected on average.

What about decreasing or declining home values?

Throughout the past century or so we have seen peaks and valleys in the value of property but on average the plain is tilted up and always has increased over time, regardless of periods of devalue. With CMHC’s findings purporting that the average CMHC backed mortgage/property has 34.8% equity in the home, this shows the ability again to withstand short periods of devalue of 10%,20% or even 30% drops which typically are short in duration and rebound quickly after.  

The information summarized above is evidence of our financial sector and government’s adherence to the protection of the Canadian economy and therefore the average borrower’s best interest (i.e. you and me)! With the average borrower scoring well in credit score, GDS score (not maxing out our debt and creating a comfort zone), and very low rate of arrears of only one third of one percent; we can say thank you to our education system and private and public sectors for making sure our lending environment is sustainable and does not place individual greed as a top priority but the common good as their number one priority.

Thank you for reading and I hope you found this insightful. Questions are welcomed and appreciated.

Cameron Wilson BA., IFSE

Dominion Lending Centres Canuck Mortgage Group

Mortgage Agent

crwilson@dominionlending.ca

Lic# 12503