A recent Better Dwelling
article about Vancouver’s real estate market claims the quality of mortgages in that city is declining.
“High-ratio mortgages combined with high loan-to-income ratios are a dangerous combination for homeowners,” the article claims. “A high-ratio mortgage is one where less than 20% is placed as a down payment, and the owner has as little as 5% equity in the home. Chances of these mortgages going underwater (i.e. the owner ending up with negative equity in the home) are already pretty high.
"This becomes even more of an issue when paired with a high loan-to-income ratio.”
The article argues rising rates would make it impossible for many buyers to afford their mortgage payments.
According to Dustan Woodhouse, though, a potential increase in rates has already been accounted for with last year’s mortgage rule changes.
“A high ratio buyer enters with a 4.64% stress test interest rate. They are already prequalified at interest rates more than 2% above today’s rates. On today’s income they are stress tested at much higher rates at their current income,” he argued. “By the time we actually get to a 4.64% interest rate, the overwhelming majority of those buyers will have seen their income increase as well. But their income doesn’t even need to increase to debt service a 4.64% interest rate because they’re prequalified.”
But the article plugs on.
It cites Bank of Canada and Ministry of Finance data that shows the quality of high ratio loans in Vancouver is deteriorating.
“The fiscal year ending in 3Q of 2016 saw high-ratio mortgages with an average LTI higher than 350%, in more than 75% of postal codes in Vancouver,” it claimes. “This is an 11% increase from the period prior, which is very strong growth. Unfortunately, this isn’t the good kind of growth.”
Woodhouse tackles this argument with a bit of math.
“Use an example of a $100,000 income and a $2000 a month mortgage payment. That’s a 500% loan-to-income ratio,” he said. “Do you really think someone making $100,000 a year with a $2000 payment is in danger?”
Use the numbers Better Dwelling
does, though, and the situation appears even less dire.
“At a 350% loan-to-income ratio, a homebuyer earning $100,000 can purchase a $350,000 home with a high ratio mortgage and have payments of $1,575 per month,” Woodhouse said.
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"Vancouver mortgages are rapidly deteriorating in quality," one recent report claims. That’s just not the case, according to one leading broker who operates in that market.