Earlier this year we heard of those “crazy Canadian banks” at it again. Despite pains the Bank of Canada has taken to prevent a housing crash of the 2008 variety, the volume of uninsured mortgages and home equity loans is startling, maybe because it’s getting harder to get an insured mortgage. Not just that; the pressure to oversell at the big lending institutions, even when it’s not in the client’s best interest, was finally been brought to light. Now, more than ever, working with an impartial mortgage broker is more important. Read on for a full exposure:
THE FINANCIAL FRATERNITY
By virtue of the fact that they are the biggest banks in Canada, our top financial institutions are also our biggest lenders. This Big Boy’s Club includes CIBC, Scotiabank, Royal Bank, and TD Bank. With the housing markets of Toronto and Vancouver pushing Canada’s real estate market towards a massive correction, it was uncovered just how exposed this financial fraternity is to the Canadian mortgage market.
As reported by The Star, “CIBC’s portfolio of uninsured mortgage and home equity loans is 5.4 times its regulatory capital.” Not only has that increased from last year, it’s a dangerous trend amongst its cohorts as well. Among the four big banks that have reported, uninsured mortgages and home equity loans are hovering at 3.3 times their total regulatory capital. And although CIBC has made it clear that the rate of loan delinquencies is both low and stable, there’s nothing to guarantee that a major shift in the housing market (or interest rates) will prevent this from changing.
Basically, what many analysts are saying to the banks is this: It’s great that most of your borrowers are still paying on time, and we’re happy that you’re able to keep your business afloat despite having hundreds of millions, even billions, of dollars in insured mortgage and home equity loans among your clientele, but, it still makes us kinda nervous. You feel me?
Or, like Edward Jones analyst Jim Shanahan, you could just say something like this. “They’ve [CIBC] continued to layer on more risk at a time when there are a lot of warning bells going off and regulators are expressing concern.”
With Canadian household debt levels at “record highs relative to income,” extraordinary housing prices, and stagnant wage growth, I feel like it may not take an analyst to see where this is going. A BuzzBuzz article published just a couple days ago passed the mic to a group of CIBC economists who were quick to point out that the consequences of a house price correction would depend on what triggered it. Uh, yeah… So if these “historically low interest rates” suddenly grow wings, we will likely see property values plummet like torpedoes. Okay, they actually used the words “property values would almost certainly tumble,” but that’s my take on it. On the other hand, if the Bank of Canada decided to buoy its overnight rate, in turn affecting variable mortgage rates, we would need a stronger economy to weather the storm. And considering our drooping loonie, things aren’t really looking on the up and up at the moment.
Analysts and the like can wax lyrical all they like about better exports, business capital spending, and a strengthening Canadian dollar, but the proof is in the pudding. And I don’t know about you, but right about now it looks pretty thin for many of my clients.
While Canadians are generally far less risk averse than our neighbours to the south, the long-term impacts of these decisions on your financial health absolutely requires you have someone impartial in your corner. Whether that’s a mortgage broker, a financial advisor, or even better, both; in the current landscape of our federal lending environment, you want someone on your side working for your best interests.
It can be very tempting to go with a super low-interest loan, go after that dream property and the like. But a long-term plan is what’s key to keeping it. Be mindful not to overextend yourself, and plan for changes. That way, no matter which way the winds of change blow, you’ll be sure to be on the right side of the breeze.