The Financial Times reported last week that the Canadian mortgage market remains ‘Boring but Beautiful’ and “an air of quiet self-congratulation has pervaded the mortgage-finance industry”. I think this is a fantastic way to look at how Canadian’s conservative nature at both a personal and government level has helped us avoid the major mortgage market crisis happening elsewhere.
The article goes on to state:
- Delinquency and foreclosure rates have scarcely risen
- Risky subprime mortgages, the scourge of the US housing market, make up less than 5 per cent of Canadian housing finance
- Though prices are starting to soften, bidding wars are still common on desirable properties in Toronto, Vancouver and Calgary
- In contrast to the uncertainty surrounding Fannie and Freddie, the US government-sponsored mortgage agencies, demand for mortgage-backed bonds issued by the Canada Mortgage and Housing Corporation is at record levels.
- The Canada Housing Trust, CMHC’s main borrowing vehicle, effortlessly raised C$12.5bn ($12.2bn) last month, bringing total borrowings to C$157bn since its inception in 2001. Foreign investors typically buy about a third of each quarterly issue
- Five-year Canadian mortgage-backed bonds are trading at 20 basis points below the dollar-denominated Libor rate, versus a negative spread of only 15 points for equivalent Fannie Mae bonds
The traditional conservative Canadian mortgage underwriting standards when compared to the US, has been the saving grace over the past year. There are 2 main items in the mortgage lending markets that have made the difference:
- Adjustable-rate mortgages – which have crippled many US homebuyers, are virtually unheard of in Canada
- The instruments tease US borrowers with low interest rates for the first year or two, but the rates then rise steeply. In Canada, home buyers usually opt for fixed-rate mortgages with five-year maturities and a 25-year amortisation period.
We did have a few variable teaser rates on RateSupermarket.ca a few weeks back where the initial interest rate was 2.25%, then it increased to over 4% after that. We spoke with the lenders and decided to show the ‘regular rate’ as some visitors thought the rates were misleading.
- The ratio of loans to home values is lower in Canada than the US
- While this does not necessarily affect delinquency rates …it contains lenders’ losses by providing more collateral in the event that the house is seized
- “There’s less innovation in the market in part because of the standards set by CMHC
The CMHC also stated that they have succeeded in opening up the mortgage market and improving competition over and above the big six domestic banks that have long dominated the market. Only the big 6 were funded by the housing trust when it started in 2001, while 25 – including credit unions and specialised mortgage lenders – drew on last month’s bond issue.
Obviously competition should help Canadians get a good deal on their mortgage through increased product creativity and diversity and lets hope this continues. Although with the government’s recent announcement to stop insuring 0% deposit and 40 year mortgages, it seems this could lessen the number of products available in the market, but as we’ve seen financial conservatism can be beneficial in the long run.