New mortgage rules could shut out 10% of low-ratio homebuyers: Bank of Canada

The central bank painted a rosier picture of household debt and housing market risks, while flagging mounting concerns about cyber threats.
The central bank painted a rosier picture of household debt and housing market risks, while flagging mounting concerns about cyber threats. Sean Kilpatrick/CP

The new mortgage stress test coming into effect on Jan. 1, 2018 could make 10 per cent of prospective homebuyers with larger down payments ineligible for a loan from a federally regulated lender, a new analysis from the Bank of Canada suggests.

The numbers are based on the proportion of low-ratio mortgages issued between mid-2016 and mid-2017 that would have been disqualified if the new mortgage rules had already been in force. The tighter qualifying standard would have cut off 10 per cent of borrowers with a down payment of 20 per cent or more, equivalent to $15 billion worth of mortgages.

Some $10 billion of that was tied to mortgages in Toronto and Vancouver, suggesting those two cities will likely see the biggest impact from the new restrictions.

Still, the Bank carefully noted it’s uncertain how borrowers and lenders will actually react to the upcoming measures.

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The stress test will affect homebuyers applying for mortgages that are smaller than 80 per cent of the value of the property they are seeking to purchase. As of next year, these borrowers will have to qualify for rates that are higher than the contractual mortgage rate they would be eligible for.

READ MORE: Here’s how much house you’ll be able to buy with the new mortgage stress test

The rules, which are meant to ensure mortgage holders can cope with rising interest rates, are similar to those already in effect for borrowers with down payments smaller than 20 per cent.

WATCH: Bank of Canada: Rising household debt creating vulnerabilities

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Bank of Canada: Rising household debt creating vulnerabilities

Some signs of improvement on household debt, housing market risks

The Bank of Canada is flagging the steady climb of household debt and still-hot housing markets as the financial system’s top vulnerabilities — but it’s also seeing some early signs of improvement.

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In a report Tuesday, the bank said there’s some evidence Canada’s exposure to these persistent trouble spots has begun to ease, thanks to healthy job creation, tightening housing policies and higher mortgages rates.

READ MORE: As tougher federal mortgage rules loom, will Canadians turn to credit unions?

The assessment is part of the bank’s semi-annual review, which explores key vulnerabilities and risks surrounding the stability of the financial system. It describes vulnerabilities as pre-existing conditions that could amplify or propagate economic shocks.

“Overall risks to the Canadian financial system remain elevated. Some preliminary signs of improvement, however, are emerging,” the bank said in its latest financial system review.

“Better economic conditions and several new policy measures support prospects for additional progress.”

READ MORE: Failed the mortgage stress test? Alternative lenders await — at a price

The report said indebtedness, especially the number of highly indebted households, remains high. Household debt relative to income has reached historically lofty levels and continues to grow, the bank said. But it noted there are already some green shoots that suggest stricter lending rules have started to reduce the country’s exposure to hefty debt loads.

The report pointed to the mortgage stress test for high-ratio borrowers introduced by the federal financial regulator a year ago. The bank predicted further easing is likely on the way due to higher interest rates and the new stress test on low-ratio borrowers to be introduced in the new year.

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READ MORE: New data shows how much it costs to rent a 2-bedroom unit across Canada

The Bank of Canada has raised its benchmark rate twice since July and experts predict it’s likely to continue along a gradual hiking path.

The combination of these factors is also expected to reduce household imbalances by applying downward pressure on prices in major real estate markets like Vancouver and Toronto.

“Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation — but we need to continue to watch financial vulnerabilities closely,” Bank of Canada governor Stephen Poloz said Tuesday in a statement.

WATCH: Job growth should balance vulnerabilities to financial system

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Job growth should balance vulnerabilities to financial system

Rising concern about cyber threats

In the report, the bank once again listed cyber threats as another key vulnerability for Canada. Poloz has said a cyberattack against the financial system is a scenario that likely troubles him the most.

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In a recent interview, he said he was unsure how severe the fallout from such an event could be and he struggled to picture what it might look like.

“Cyberattacks do not respect borders: they can originate from outside Canada and be transmitted across the global network that financial institutions rely on to operate their businesses,” the report said.

READ MORE: Russian cyberattacks targeted 39 countries and combined hacking, forgery, disinformation

The bank said it has been working with industry, international organizations and federal and provincial authorities to improve collaboration and policy-making to ensure rapid response and recovery from a cyber event. An example could include a loss of connectivity or corruption of data within the payments system.

The report also assessed how the biggest risks facing Canada have evolved since its last update in June. It said the chances of a severe nationwide recession or a drop in global growth triggered by a significant financial disruption in an emerging market, like China, remained elevated.

However, the bank added that the chances of these scenarios playing out were decreasing.

—With files from the Canadian Press

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