Mortgage risks fading thanks to higher rates, tougher rules: Bank of Canada

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OTTAWA — The Bank of Canada is releasing data today that provides a closer look at just how much stricter mortgage rules and higher interest rates have helped slow the growth of new highly indebted households.

The central bank is on a clear rate-hiking path and the pace of future increases hinges significantly on the ability of households — particularly those with high levels of debt — to adapt to higher borrowing costs.

The bank’s analysis says tougher mortgage qualification tests have reduced the share of new high-leverage, insured loans — those of more than 4.5 times a borrower’s annual income — to six per cent in the second quarter of 2018 from 20 per cent in late 2016.

The report also says another rule change this year aimed at uninsured mortgages dropped the share of these new loans to 14 per cent in the second quarter of 2018, compared with 20 per cent a year earlier.

Senior deputy governor Carolyn Wilkins says the new mortgage rules are improving the quality and reducing the quantity of new mortgages.

Wilkins says household debt remains very high and has created a vulnerability in the financial system — but she argues the better quality of loans will put the economy on a more-solid footing to withstand future adverse economic developments.

The Canadian Press