The reason for the new regulation was federal government concerns about the rising debt-to-income ratio in the average Canadian household and the inference too many people on the edge of qualifying for a mortgage still managed to secure financing, putting them at risk.
Shortening the amortization term might keep some potential buyers out of the market, as monthly payments will increase, but over the long haul, the upside is paying a whole lot less in interest on the loan.
But back to the bigger picture — debt-to-income ratios — which a majority of Canadians don’t seem too worried about, according to the annual RBC Homeownership Study released earlier this month.
The study found Canadians are confident in their ability to continue paying down their mortgages and believe they have the means necessary to handle a drop in house prices, should that occur.
“Almost three-quarters of Canadians, or 73%, believe that they or their families are well-positioned in the event of tumbling home prices,” says the study, undertaken by Royal Bank of Canada.
Of the respondents in a poll conducted to form the study, 85% feel they are “doing a good or excellent job of paying down their mortgage, while 90% ... are confident that real estate in Canada is a good investment.”
Certainly, any risk of a financial meltdown in the housing market, which some believe would lead to a U.S.-style collapse, must be taken seriously, but the actual potential of a meltdown must also be measured.
“There’s been a lot of noise around debt-to-income ratios,” said Marcia Moffat, RBC head of home equity financing. “(I find) it comforting such a large segment of Canadians said they were able to handle what is typically the biggest purchase of an individual’s life.”
The high confidence level is based on stable employment and rising incomes, said Moffat.
An earlier report from the Canadian Association of Accredited Mortgage Professionals supports the RBC study’s viewpoint.
Will Dunning, author of the CAAMP report, said Canadians have been much more careful with their finances than our American cousins.
“The essential finding of (our) research report is that Canadians — lenders and borrowers — have been highly prudent in the mortgage market … a vast majority of borrowers have left themselves considerable room to absorb increases in interest rates,” said Dunning, adding in his conclusion, “There is always risk in the mortgage market. In the Canadian experience, the major risk factor is loss of ability to pay (especially due to job loss).
“A secondary risk factor is unaffordable increases in payments. This research report concludes that this is a negligible risk factor at present and in the near-to-medium term future.”