CMHC eases mortgage underwriting criteria
It’s been well documented that home prices went on a historic rally in the first half of this year. That left a record number of people stretching to afford their mortgage.
One can’t help but wonder how many of those borrowers will be in danger of missing their mortgage payments. While that number is elusive, new survey data suggest it may be less than thought.
According to the Leger Marketing survey of 1,542 Canadians, conducted on behalf of RATESDOTCA and BNN Bloomberg from June 18-20, nearly half of Canadians (47 per cent) have owned their home for five or more years. As a proportion of Canadian homeowners, more than three quarters (76 per cent) first entered the real estate market at least half a decade ago, the survey found.
That means they’ve won the Canadian housing sweepstakes — amassing at least 35 per cent equity (more than $175,000) on average, based on the most recent national home price data.
In many cases, mortgagor’s equity gains since 2016 have vastly exceeded that level. For those folks, there are ample options if times get tough, like refinancing or selling and using the proceeds to pay off debts.
But that fact hides a far more vulnerable group, namely, some of those who bought a home this year. Many of them had to overstretch to get a mortgage. And so the risk they face is much greater.
That’s especially true for the one in eight of all Canadian homeowners (13 per cent) who spend more than half their take-home pay on home carrying costs. Carrying costs are the combined tally of mortgage, property tax, insurance and utility payments.
Normally, lender guidelines say carrying costs should account for no more than 32 to 39 per cent of gross income.
Those folks are in a far more precarious spot if they face an income interruption.
About one in every 25 homeowners (four per cent) spend more than two-thirds of their household after-tax income on housing costs, according to the survey. That represents approximately one home per residential block nationwide.
Those folks have their shelter costs covered; but when it comes to food, clothing and other necessities, their lives are far less luxurious.
For homeowners with mortgages, one of the biggest threats to their household budget is a higher mortgage rate. While most survey respondents said they could afford a reasonable increase to their mortgage, one in 25 (four per cent) would consider selling their home if mortgage rates were to rise.
Among those who know how much more they can afford each month, only three in 10 (29.5 per cent) said they could afford at least a $500 increase in their monthly payments. Fortunately, given the average mortgage size, a $500 per month jump in payments implies a roughly 400-basis-point surge in interest rates.
A move of that magnitude is highly unlikely if you believe the bond market. It is pricing in an eventual 200-plus basis point increase in the Bank of Canada's key lending rate before rates level off.
Clearly, data like these reinforce what most already know. Canada has a two-tiered homeownership market, split among those hanging on by their fingernails and those in a far more comfortable, equity-rich position. It’s the former group that we all need to worry about — particularly when home prices get so stretched that they snap back like an elastic.
BNN Bloomberg has teamed up with RATESDOTCA to take the pulse of Canadians every month on key pocketbook issues as we strive to better understand how households are navigating COVID-19. This is the second instalment in monthly special coverage.