Mortgage lending gets tougher in Canada

The Canadian housing market has been growing rapidly in the past few years. Currently, many experts fear that home in cities like Toronto and Montreal are greatly overvalued, a reflection on the general instability in the Canadian economy. While Bank of Canada has yet to announce its well anticipated interest rate hike that will curb the rapidly rising house prices, lenders have already begun tightening lending rules and raising mortgage rates.


Early this month, major lenders Bank of Montreal, CIBC and Royal Bank of Canada have all raised rates on various types of fixed rate mortgages. Both Bank of Montreal and Royal Bank of Canada raised mortgage rates by 0.2% and rates at CIBC raised by 0.05%. The higher rates of lending is thought to precede Bank of Canada’s anticipated rate hike, which may come as soon as tomorrow.


Accompanying the higher mortgage rates is a series of other lending restrictions put in place by Canada’s banking regulator, The Office of the Superintendent of Financial Institutions (OSFI), that begun as early as fall of last year. The OSFI recently proposed to require stress tests on uninsured mortgages, a procedure that is already in place for insured mortgages and five year mortgages, Canada’s most common mortgage type. These stress tests filter out applicants by requiring borrowers to be able to afford a rate 2% higher than their contract rate, or to be able to qualify at Bank of Canada’s posted rate of 4.64%.


Furthermore, provincial regulations regarding foreign buyers are currently limiting lending in both Vancouver and Toronto, two of Canada’s hottest housing markets. In British Columbia, there as long been a 15% tax on foreign buyers. In Ontario, the same 15% tax on foreign property buyers has been put into place this May.


Currently, economic growth in Canada is high and inflation is low. The economy grows at a pace of 3.7% annual and had the fastest pace of growth amongst the G7 countries in the first quarter of 2017. However, there are several indicators that point to instabilities in the near future. Amongst them is the country’s high level of debt burden. Canada has the second highest credit to GDP ratio out of the G7 countries, a ratio that indicates financial insecurity.


All these measures instituted by mortgage lenders and by the OSFI take a lot of pressure off markets in Canada, and will likely ease the rise of house prices and further stabilize Canada’s financial system.

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