The Canadian Association of Accredited Mortgage Professionals (CAAMP) conducted a study that I thought I would share with you the results. With over 12,000 members representing over 1,700 companies, CAAMP is the voice of Canada’s mortgage industry.
A new study released by CAAMP concludes that very few Canadians face unaffordable increases in mortgage costs and Canadian lending criteria are already tight.
The report entitled, “Revisiting the Canadian Mortgage Market – The Risk is Minimal” states that “lenders and borrowers have been highly prudent in the mortgage market … and a vast majority of borrowers have left themselves considerable room to absorb increases in interest rates.”
The study said 79 per cent of mortgages are fixed rate and mostly for terms of five years or longer, leaving 21 per cent of borrowers with variable rates and more exposure to changes in interest rates. The study was based on about 59,000 mortgage loans (excluding renewals or refinances of existing mortgages) totalling just under $16 billion, which were funded during 2010, which represents about one-quarter of the total mortgage activity.
The study reported that the average gross debt service (GDS) ratio was 19.6 per cent, well below typical lender standards of 32 or 35 per cent used to qualify borrowers. The average total debt service (TDS) was 28.9 per cent, still well below the 45 per cent lender standard.
For fixed rate mortgages the GDS was 22. 5 per cent and the TDS was 32.5 per cent.
According to the report a 2.5 per cent rise in interest rates for variable mortgages would see the average GDS would increase to 24.6 per cent and the average TDS would increase to 33.7 per cent. CAAMP’s research indicates that of the mortgages funded in 2010, only 800 to 950 would exceed the 45 per cent TDS ratio.
For fixed rate mortgages, a one per cent increase in interest rates would increase the average GDS to 22.5 per cent and the average TDS to 32.5 per cent and less than one per cent (1,000 to 1,350) would have TDS ratios of more than 45 per cent.
The Association also found that among the high ratio loans approved in 2010 – with the reduced amortization period (30 years versus the prior 35 year limit), a small minority (about 2 per cent) would have TDS ratios above 45 per cent and those loans would probably not qualify. Some of those consumers would still be able to buy, by buying lower priced homes.
The report cited job loss or reduced income as the main reason for mortgage defaults, saying that “Unaffordable premium increases are a negligible risk factor at present and in the near-to-medium term future.”
A third cause is unaffordable increases in mortgage payments, something that caused difficulty in the U.S. as low introductory rates were replaced by market rates and payments that rose substantially. Stated the report “But this third category of risk is the source of recent concerns about future threats. This study concludes that very few Canadians face unaffordable increases in mortgage costs.”