According to the CMHC, Canadian credit ratings are on the increase. 80.7% of mortgage holders have very good to excellent credit scores, and the percentage with fair to weak credit scores has dropped to 10.2% from 11.8% five years ago.
Canadian Mortgage Holders Appear to be Coping
According to the report mortgage holders in general, have better credit ratings than non-mortgage borrowers. Amongst the latter group, the quantum of fair and poor credit ratings was as much as 3.9% higher than that of the mortgage holders. What’s more, the gap has increased since 2014.
This may indicate that mortgage payers are coping with repayments in a period of rising interest rates and higher property prices. Insurance companies should welcome this information as there has been wide spread concern over defaults in these pressurised economic times.
A former CMHC economist, Novak Jankovic, has pointed out that mortgage defaults are at their highest between five and seven years after initiation of the mortgage and he remains concerned that those who borrowed several years ago may not cope with the likely future increases in the interest rates.
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Interest Rates Where To Next?
The Parliamentary Budget Office (PBO) recently reported that interest rates would rise from 2.1% in the first quarter of 2017 to 4.8% at the end of 2021. The decade of low interest rates that Canadians have grown accustomed to is at an end. The PBO estimates that during the same period the rate on non-mortgage debt will increase from 5.4% to 7.6%, causing a considerable rise in the debt service ratio.
This and the upcoming changes in OSFI rules, which includes a mortgage stress test is likely to slow the property market down. The rise in mortgage rates is expected to be gradual so borrowers do have time to take action.
New Regulations Will Affect Borrowers
Many first-time buyers and those that require high ratio mortgages will be seriously affected by the change in mortgage rules announced by the federal government in October 2016 as they will no longer qualify for conventional mortgages.
The new legislation is the government’s response to large increases in the price of property in the large cities. Government fears that when interest rates rise, as has been predicted, there may be a large number of defaulters and households in financial distress.
In future all those seeking insured mortgages will be subjected to a stress test. In the past borrowers who were able to make a down payment of more than twenty percent were not subjected to this test.
The stress test is used to assess whether the borrower would still be able to afford payments if the rates were to rise to the Central’ Bank’s five-year forecast. This is despite the fact that the forecast rate is usually significantly higher than the rate that the borrower is able to negotiate. The new regulations also set a ceiling of 39% of household income to be spent on taxes, utilities and mortgage payments.
New regulations governing mortgages could negatively affect the borrowers hoping to become first time homeowners. Increasing property prices in large Canadian cities prompted the federal government to introduce new legislation governing mortgages.
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