Category Archives: second mortgages

Can You Qualify For A Mortgage After A Consumer Proposal?


After you file a consumer proposal, the last thing on your mind might be a new mortgage, but you may be a lot closer than you think.

Maybe you wish to buy a home, or you own a home and are interested in refinancing your mortgage. Let’s first talk about purchasing a home.

When Can You Buy A Home After A Consumer Proposal?

Actually, this question comes up often. People want to know how soon can they buy. Sometimes they ask right after they file their consumer proposal, and other times it’s more than five years later, after they’ve paid it off in full.

First things first: pay off your consumer proposal completely before you take on major new mortgage debt.

If you have at least a 20% down payment, you may even be able to buy as soon as you complete your consumer proposal! As in, immediately.

Alternative lender adviceYou will almost always be working with either a B-lender or a private lender, but it is doable. But it’s more than just a matter of having finished your consumer proposal. Make sure you have been rebuilding your personal credit historywith new credit facilities and by cleaning up reporting errors. (There are ALWAYS reporting errors after you file a consumer proposal)

If you have less than 20% down payment, you will be looking for a high-ratio mortgage, which has default insurance, from one of CMHC, Genworth or Canada Guaranty.

In that case, you will need at least two years of clean, new credit since you completed your consumer proposal. But it’s best if you have at least two tradelines (credit card, loan, line of credit, etc.) with limits greater than $2,000.

Worst case scenario, three years after you completed your proposal, or six years after you filed your proposal (whichever comes first) it will fall off your credit report and whether or not you qualify for a mortgage to purchase a home will depend on the usual mortgage qualification criteria we all face.

When Can You Refinance Your Home After A Consumer Proposal?

This, too, can happen very quicklyin fact, we have helped numerous homeowners refinance their homes so they could complete their consumer proposal early. In some cases, it was as soon as the terms of their proposal were ratified in court.

This is what we call a lump-sum consumer proposal, and can be a very attractive way to settle your debts if you are a homeowner.

Should You Pay Off Your Consumer Proposal When You Refinance?

Actually, there are a few private lenders who will allow you to leave your proposal unpaid while you extract equity from your home. But unless there are specific, logical reasons to doing this, it’s not something I recommend.

refinancing to pay off a consumer proposalI prefer refinancing to completely pay off the remaining balance owing on the consumer proposal. There may also be other things you need money for at the same timelike a home improvement project or a child’s higher education, or other family debts.

CRA debt crops up quite a lot too, particularly for those who are self-employed. You can take care of all these at the same time, provided you pay off the consumer proposal.

Why Would You Pay off Your Consumer Proposal Early?

1) Fear of the mortgage renewal. This concern is very real if your mortgage lender had a credit card or loan product included in your consumer proposal. They might have no interest in offering you a renewal when your current mortgage matures. So, you need to get in front of this issue as soon as you can, if your situation allows for it.

2) A strong desire to rebuild your personal credit history. Once you file your CP, your credit score is going to take a major beating. All debts included in the proposal will be reporting as R7s on your personal credit report.

Worse than that, some of them will be erroneously reporting as R9swritten off completely.

confused mortgage consumerAnd some credit cards may say they were included in a bankruptcy, even though that is not true.

A few credit cards even report ongoing late payments after the proposal was filed. And sometimes even after the proposal is completed!

If you want to fix the damage to your personal credit report resulting from your consumer proposal, you are going to have to wait until it is paid in full and you have a completion certificate from your trustee. Here is additional information on rebuilding credit after a consumer proposal.

3) Wish to be normal. When you have bad credit, everything in life seems tougher and more expensive. Even if you wish to rent a home, not buy one, the landlord will usually ask for a copy of your credit report.

And if you want a new smartphone, or lease or finance a new car, bad credit will make all this that much harder.

If you allow your consumer proposal to run the full five years, that means it could be in your credit history six years altogether. It falls off three years after you complete, so keep that in mind. You can significantly shorten the waiting time by paying the consumer proposal off early.

4) Improve cash flow. In nearly all cases when we refinance a home where the owner is paying off a consumer proposal, they see an improvement in their monthly cash outflows. In a society where half of us are living paycheque to paycheque, this is attractive.

How Do You Refinance To Pay Off A Consumer Proposal?

First, your mortgage broker will do a thorough assessment of whether or not this is even doable. S/he will assess the marketability of your property, the amount of untapped equity, the reasons behind you filing your consumer proposal, as well as all the normal stuff lenders look at when reviewing a mortgage application.

An important consideration is your current first mortgage. Was it just renewed, or is it nearing maturity? Which lender is it with, and what might the prepayment penalty be if you were to break it and refinance to a new first mortgage with a B-lender?

Plan BAnother consideration is whether or not your first mortgage is registered as a collateral charge, and if so, to what amount is it registered? We wrote about this a few months ago it can make things difficult.

If refinancing the current mortgage makes sense, your broker will present your application and a presentation to the B-lenders most likely to entertain a file like yours. And s/he will bring back quotes for your consideration. If you choose to proceed, most of the time the entire process can be wrapped up in four to six weeks.

We actually see that happen less often than the other approach,which is to first apply for a private second mortgage.

In this scenario, the first mortgage is left intact and a new lender is found who will lend enough money to cover the proposal balance, any other debts and needs, and all the expenses associated with the mortgage.

During the term of the second mortgage (usually one year), we take the opportunity to cleanse all the reporting errors from the credit report, and also to strengthen the borrower’s credit profile with new healthy credit.

After a year, (longer if that makes sense) we then refinance the two mortgages into a single first mortgage.

It would be normal to expect this new replacement mortgage to be with a B-lender, since the consumer proposal is still fairly fresh. Here are some insights into how to do this.

The Wrap

Ultimately, the goal is to take the homeowners back to the world of A-lenders. That is usually possible after three years, but we have seen instances where it happened much sooner.

But it was never going to happen if the clients didn’t first make the decision to pay off the consumer proposal ahead of schedule.

Source: Canadian Mortgage Trends – ROSS TAYLOR

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Shadow Lending Growing as Canadians Chase Housing Dream

Mortgage broker Samantha Brookes is trying to figure out how to get one of her clients out of a housing-fueled debt hole.

The couple, a 59-year-old Toronto city worker and her husband, 58, have so much debt that they stopped making payments on the C$410,000 ($318,000) mortgage for their suburban home. They wanted to refinance but regulations imposed last year will disqualify them. In a few weeks, they won’t even qualify for an uninsured loan at an alternative lender as more rules come into effect.

They opted for a third route: adding a second mortgage with an interest rate of 10.5 percent to pay off their debt. Their salvation came from a private unregulated lender, a move many other Canadians are making as the government tries to rein in a home-price surge that’s driven household debt to a record. But like a giant game of Whac-A-Mole, the risk to the financial system from tapped out borrowers is merely shifting — this time to a market where there’s no oversight from the country’s national bank regulator and new stress-test rules don’t apply.

“We’re transferring risk from the regulated segment to the unregulated segment of the market,” Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, said by phone from Toronto. “If we have a significant correction, clearly the unregulated markets will suffer even more because that’s where the first casualties would be. And then you will see it elsewhere.”

Erik Hertzberg / Bloomberg

Brookes says more than 90 percent of her business in the last two months has been lining up funding from non-bank and private sources, or shadow banks — versus a 50-50 mix previously. “People aren’t going to stop buying, they’ll just find different ways of doing it.”

For the government, it may be a case of careful what you wish for. Anxious to prevent a repeat of the kind of taxpayer-funded bank bailouts that occurred in the U.S. after its housing crash a decade ago, the federal government has been moving to reduce its exposure to the mortgage-insurance market.

Read More: Canada’s Bank Regulator Toughens Mortgage Qualifying Rules

Rules last year added a stress test for insured loans backed by the government. That sent more buyers to the uninsured space, where a 20 percent down payment is required. As of Jan. 1, these borrowers will also need to qualify at a rate two percentage points higher than their offered rate, a move which could lower mortgage creation by as much as 15 percent, Canada’s bank regulator has said.

Earlier changes have already had a dramatic effect. Uninsured mortgages made up about three-quarters of new loans at federally regulated banks this year, up from two-thirds in 2014, according to the Bank of Canada. Roughly 90 percent of new mortgages in Toronto and Vancouver this year are now uninsured, in part because government insurance is forbidden on homes priced over C$1 million ($780,000) and prices have risen, the bank said.

Initial Bite

On the one hand, taxpayer risk has dropped as insured mortgage origination fell 17 percent in the second quarter compared with a year earlier, the bank said in its semi-annual financial system review. About 49 percent of all outstanding mortgages are now uninsured, up from 36 percent five years ago. The credit quality of some of the loans at the big banks have also improved as borrowers buy less expensive homes, the Bank of Canada said.

The rules, along with other measures such as a foreign-purchase tax, have had an initial bite — with Toronto house prices falling 8.8 percent from May to November and the average price of a home posting the first annual drop since 2009. Vancouver prices have reclaimed new heights after cooling earlier this year.

But the risks to the financial system haven’t gone away. In the uninsured space, mortgages are increasingly going to highly indebted households and for amortizations for longer than 25 years, the central bank said. And like Brookes’s clients drowning in house debt, more borrowers are turning to lenders whose activities fall outside federal regulatory scope.

These include credit unions and mortgage-investment corporations, pools of money from individual shareholders, which aren’t subject to the new rules, Tal said. Credit unions hold about 17 percent of uninsured mortgages, according to the Bank of Canada.


Canada’s patchwork regulatory system also doesn’t encourage comfort, Tal said. Banks are regulated by the Office of the Superintendent of Financial Institutions, but credit unions and brokerages are overseen provincially. Mortgage-finance companies are semi-regulated, and MICs and other private lenders are unregulated.

MICs currently make up about 10 percent of mortgage transaction volume, or 6 percent of dollar volume, according to research from Tal at CIBC said. Transaction volume will likely grow to about 14 percent under the new rules, and in the event of defaults in a housing correction, those MIC investors would be open to losses, he said.

“Anything over 10 percent is sub-optimal,” he said. “You don’t want this market to be too big because you don’t want to increase the blind spots.”

Sound underwriting is an important element in maintaining a strong and stable Canadian financial system and OSFI will continue to monitor the country’s housing and mortgage markets under the new rules, Annik Faucher, spokeswoman for Ottawa-based organization said in an email.

Need Solutions

Like her clients, Brookes said borrowers will get creative to get around the new rules. Options include companies like Alta West Capital, Fisgard Asset Management Corp. and Brookstreet Mortgage Investment Corp. or just a wealthy individual willing to lend at interest rates starting around 12 percent.

Fisgard didn’t respond to request for comment, Brookstreet declined to comment while Chuck McKitrick, chief executive officer at Calgary-based Alta West said MICs are regulated by the country’s securities commissions and various real estate bodies.

“We’re scrutinized a hundred different ways,” said McKitrick. “There’s very little difference between us and other regulated entities.”

Despite the expectation that MICs will see more business, McKitrick said the big financial institutions will adapt to new regulations to keep lending. Shawn Stillman, a mortgage broker at Mortgage Outlet Inc., said banks could lower their mortgage rates so homebuyers would still qualify under the new stress-test rules.

“The bank doesn’t care because they’re still going to make their fees and get their money,” Stillman said by phone from Toronto.

Alta West predominantly lends to entrepreneurs and new Canadians, groups that typically have a harder time getting a mortgage at one of the big banks. Its rate of mortgages in arrears is about 2 percent, he said. That compares with about 0.2 percent at the big banks and about 0.4 percent for the credit unions, according to data compiled by the Canadian Credit Union Association.

“People need solutions — it could be temporary, but at least they have a home over their head,” Brookes said.

Source: – By Allison McNeely and Katia Dmitrieva 

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…mortgages made simple…



The Ray McMillan Mortgage Team  is licensed through Northwood Mortgage Ltd. We deal with major banks, trust, life insurance, finance companies and private lenders. We are licensed to provide the most competitive mortgage rates and terms available for your real estate financing needs throughout Ontario.



  • First and second mortgages
  • Transfers
  • Condominium/Townhouse purchases
  • Home Improvement Loans
  • Construction Loans
  • Debt Consolidation
  • Refinancing
  • Power of Sale
  • Multi-residential
  • Vacant land
  • Cottages and recreational properties
  • Rural and farm properties




When we arrange a prime residential first mortgage the lender pays us a finder’s fee.This does not affect the rate our terms of the mortgage in any way.

When we arrange any other type of mortgage that does not qualify as a prime residential mortgage then the lender does not pay us. We must then charge a brokerage fee*. The fee is based on the complexity involved to arrange the mortgage.


You have mortgage questions, the Ray McMillan Mortgage Team has answers.

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Shadow mortgage lending on the rise as house prices soar

Canadian house prices have risen 36 per cent since June 2009, according to the Teranet-National Bank.

Canada’s housing boom is increasingly driving homebuyers to seek mortgages from private lenders, who demand rates that can be more than five times higher than those charged by the nation’s banks.

Canadian house prices have risen 36 per cent since June 2009, according to the Teranet-National Bank house price index. At the same time, Canadian banks have become more conservative and regulators are making it harder to lend, giving rise to an alternative market, including Canadians who refinance their own homes at low rates and then use the money to become mortgage lenders themselves.

Some analysts say a housing investment is increasingly risky because the pace of price increases has vastly outstripped wage growth, all amid a time of historically low interest rates and record debt levels. If and when interest rates rise, the concern is that consumers would have little ability to increase their payments, because they have so much debt.

“The risk arises if the unintended consequence of regulation is to push out the risk profile of the less regulated sector, and to encourage it to grow quickly at the same time,” said Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute.

“In dollar terms it is not a huge part of the economy (but) my concern is that we pay attention, because small problems sometimes get unexpectedly large, and quickly so.”

Mortgage broker Lou Perrotta said that in terms of volume, 20 per cent to 30 per cent of the mortgages he puts together are now privately financed, typically because borrowers are declined for a bank loan for reasons like a low credit rating or unsteady income. That represents about $4 million to $5 million of the $20 million of mortgage business he does annually, he said.

“Business is brisk, without question. (It has) probably tripled in the past three years,” said Perrotta, president of Domus Financial Corp in Toronto, where house prices have increased by 55 per cent in the last six years.

‘It’s not for the faint of heart’

Perrotta acts as a matchmaker between individuals who have money to lend – and who are seeking higher rates of return than can be had in stocks or bonds – and borrowers who are willing to pay a higher mortgage rate to get into the market.

He also invests his own money, lending between $25,000 and $250,000 each to “five or six” borrowers a year who offer a good balance between risk and return.

“It’s not for the faint of heart, and you need to understand the dynamics of real estate,” Perrotta said.

One private lender, who asked not to be named because she is close to the real estate market and fears hurting her business, took out a C$400,000 mortgage on her paid-off home at 2.49 per cent and then gave that money to a broker that lent it to a borrower at a higher rate, for a fee.

“Who the hell is going to give me 9 per cent return?” said the lender, who said she has recourse to the borrower’s assets if he defaults.

Shadow lending ‘growing very fast’

CIBC senior economist Benjamin Tal said the shadow lending market represents about 4 to 5 per cent of Canada’s overall mortgage market.

“This is something that is growing very fast, because many borrowers are not having access to banks because the banks are highly regulated,” said Tal.

In Ontario, Canada’s most populous province, private lending accounts for about 4 per cent of new mortgage originations, or $1.1 billion, or 2 per cent, of total mortgage lending by dollar value, according to Teranet.

While that’s a fraction of the sub-prime lending that got the U.S. housing market into trouble seven years ago, analysts are concerned that the market is growing rapidly and may be concentrated in hot housing markets such as Toronto and Vancouver where a sudden downturn could take hold.

Legal practice

The practice is legal, and can be done through a person-to-person loan, in which the lender is named as a lienholder on the mortgage, or through a Mortgage Investment Corp, in which investors can pool their money to lend to those who either don’t qualify for a traditional loan.

While major Canadian lenders offer five-year fixed mortgage rates at about 2.5 per cent to qualified borrowers, rates in the private market range between 7 per cent and 15 per cent, one mortgage broker said.

Traditional lenders also send business to alternative lenders, feeding the pipeline.

Royal Bank of Canada, the country’s biggest bank, said when a client does not qualify for a mortgage, the bank will recommend an alternate lender, which may include a trust company, a mortgage broker or a private mortgage corporation, an RBC spokesman said in a statement.

Canada’s financial system regulator, the Office of the Superintendent of Financial Institutions, said it monitors the alternative mortgage market but would not comment on its size, whether it was growing or whether OSFI had any concerns.

Anthony Croll, vice president of Individual Investment Corporation, a Montreal-based private lender that has been in business since 1958, said he’s seen a rise in the number of small private lenders over the last few years competing with the 10 per cent to 12 per cent interest his company would charge.

He also thinks inexperienced lenders may be underestimating the risks associated with non-payment of a loan.

“Occasionally an accountant or someone else has said – after hearing about our rates, or what the deal is – ‘I can do that myself,'” Croll said. “But you know everything is easy and fine to do until you have a problem.”

Source: By Andrea Hopkins, Thomson Reuters Posted: Jul 09, 2015 2:36 AM ET

Low rates, high risk: Behind debt’s record climb

Toronto and Ottawa — The Globe and Mail

This is part of a Globe series that explores our growing dependence on credit – from the average household to massive institutions – and the looming risks for a nation addicted to cheap money. Join the conversation on Twitter with the hashtag #DebtBinge

Bank of Canada Governor David Dodge was getting nervous.

The year was 2006 and the mortgage market was heating up. Canada Mortgage and Housing Corp. appeared to be adding fuel to the fire by agreeing to back risky interest-only mortgages – mortgages with 35-year amortizations and home equity lines of credit.

In a letter to Karen Kinsley, then president of the Crown mortgage-insurance agency, Mr. Dodge called the moves “very unhelpful.”

“We were increasingly relying on household borrowing for both purchases of housing and other consumption, as opposed to household income growth,” recalled Mr. Dodge, who left the bank in 2008. “We were very worried that by loosening up the rules about mortgage insurance we were putting additional pressure on Canadians to borrow for housing, and that was leading to house price inflation and increased indebtedness.

“We argued that the right thing to do at that point in time was to be tightening conditions, rather than loosening.”

Nearly a decade and a lot of debt later, Mr. Dodge’s fears have come home to roost. Years of easy borrowing conditions have helped push household debt burdens to unprecedented heights.

As of the end of March, Canadian households’ combined debts totalled more than $1.8-trillion – equivalent to more than $50,000 for every man, woman and child in the country. The total is more than five times the amount in 1990, and is up more than 50 per cent since the end of 2007. The ratio of household credit-market debt to disposable income – the most common benchmark for consumers’ capacity for shouldering their debts – stands at a record-high 163.3 per cent, nearly double the rate of 1990 and up nearly 20 percentage points from the 2008 onset of the financial crisis. And we’ve reached these heights at a time when Canada’s economy is wobbling, its housing market is significantly overvalued and the Bank of Canada has cut already-low interest rates even further. Since the central bank’s January rate cut, the pace of mortgage debt has re-accelerated to its fastest growth in more than two years.

Mr. Dodge’s recollections are a reminder that our national household-debt dilemma didn’t happen overnight; its foundations began years ago, even before the global financial crisis and Great Recession created the conditions that have brought the issue to a head. A combination of relaxed public policy, cheap borrowing costs, an explosion of new credit offerings and an extended boom in real estate prices put Canadians on a slippery slope to record debts. Government agencies, banks, businesses and consumers themselves have all played a role in creating Canada’s biggest economic dilemma – abetted by a technological revolution that has made accumulating debt easier, faster and more deceptively painless than ever before.

For years, a string of policy makers in Ottawa – from the scolding of overstretched consumers by former Bank of Canada governor Mark Carney, to the finger-wagging at mortgage-rate-cutting banks by the late finance minister Jim Flaherty, to the low-level fretting by current Bank of Canada boss Stephen Poloz – have been warning that the debt predicament poses a potential risk both to Canadian households and to the stability of the country’s economy and financial system.

Yet their policies have sent consumers a different message. The central bank has kept interest rates persistently low – aided by the federal government’s zeal to eliminate its budget deficit, which has starved the economy of government contributions to economic growth and thus strengthened the case for low rates to stimulate the economy. The low-rate environment continues to act as a flashing green light for consumers to borrow.

“We have the wrong mix of policies,” Mr. Dodge said. “We have very distorted financial markets at the moment, and one of the consequences of these very low interest rates is that there has been additional incentive for households to take on debt. Why not take on debt when you can borrow mortgage money for 3 per cent?

“You can’t go and criticize households for doing what is sensible, given the incentives they face.”

A history of borrowing

The early groundwork for the unprecedented build-up of consumer debt was laid more than two decades ago, when the Canadian government and the Bank of Canada committed to inflation targeting, the key to breaking the back of the dual threat of bloated inflation and high interest rates. The enduring benefit was an extended era of low, stable inflation that continues to today, bringing with it low borrowing costs. The new low-rate environment helped unleash a wave of pent-up consumer demand in the 1990s after years of prohibitive rates, recession and tepid recovery, and ushered in an unprecedented stretch of economic expansion through the 2000s, not just in Canada but throughout much of the Western world that had pursued similar policies to contain inflation. But the downside, to which the world was rudely awakened in 2008, was a teetering tower of excessive debt and risky lending that eventually toppled on a global level, sending the world’s financial system into major crisis and triggering the worst economic downturn since the Great Depression. In the height of that crisis, the actions taken by policy makers, not just in Canada but throughout advanced economies, almost certainly rescued the world from a second Great Depression – but they also poured gasoline on Canada’s household debt fire.

To keep the suddenly credit-squeezed global financial system from freezing up, central banks around the world aggressively slashed interest rates. In Canada, where the banking system was remarkably healthy but the economy was slipping into the global quicksand, the Bank of Canada’s rate cuts were designed to fuel household consumption, carry the country’s economy and avert a potentially long, painful recession at a time when export markets had flamed out and manufacturing output was slumping badly.

“We knew back in 2008 that stimulative monetary policies would encourage people to borrow more to buy more homes and cars. That is why we do it – to buffer the downturn in the economy,” said Mr. Poloz in a speech last fall. “This happens in every business cycle, not just this one.”

But the difference in this recovery, Mr. Poloz acknowledged, is how extraordinarily long it has taken – five years and counting. The continuing need to prop up the teetering economy with stimulative monetary policy has meant consumers have been exposed to rock-bottom borrowing rates for an unusually long time, keeping the door wide open for cheap borrowing that has helped stretch household debts to new extremes.

“There are trade-offs, lots of them,” he said in a late-2013 speech. “Today, the most obvious is that prolonged low interest rates can result in the development of imbalances in the household sector.”

Real estate: an asset or liability?

The biggest element, by far, in Canada’s ballooning household debt numbers has been residential real estate. The country’s mortgage debt has more than doubled in the past decade, to nearly $1.3-trillion.

The new era of cheap interest rates dramatically lowered mortgage costs, fuelling a corresponding surge in home prices. The Canadian government responded to the housing boom by softening mortgage regulations to make it easier for Canadians to buy homes – even Canadians who couldn’t afford to under traditional mortgage structures.

Despite Mr. Dodge’s 2006 misgivings, by the end of that year CMHC had followed the lead of private insurers, such as Genworth MI Canada Inc., and bumped up mortgage amortizations to 40 years. The move added more fuel to an already hot housing market, and made home-buyers out of a new class of higher-risk borrowers and speculative investors. In doing so, Canada was following the lead of the United States, where high-risk mortgage products had become all the rage in the financial industry – and would provide the toxic fuel for that country’s mortgage meltdown.

Canada’s high-risk mortgage party didn’t last long. Starting in 2008, the federal government did an about-face, taking a series of measures to try to cool the housing market and discourage excessive borrowing. It cut amortization periods to 35 years, then 30 years and finally 25 years in 2012, while progressively ratcheting up minimum down payments to 20 per cent from zero on government-insured mortgages, and capping the volume of CMHC mortgage insurance and stopping the practice of backing second-home mortgages.

What spared Canada the mortgage meltdowns experienced in the United States and elsewhere in the financial crisis was that the government opened the spigot relatively late in the game, Mr. Dodge said, curbing the use of riskier mortgage products. Still, critics aren’t convinced that Ottawa ever quite managed to put the genie back in the bottle. With persistently low borrowing costs still fuelling an uncomfortably hot housing market, many observers, including the International Monetary Fund, argue that Canada needs tighter mortgage regulations – its “macroprudential” measures – to apply some brakes on the housing boom and slow the growth in mortgage debt.

Quenching Canadians’ debt thirst

While cheap interest rates led Canadians to the credit trough, they don’t entirely explain why consumers have been so eager to drink. Current consumers’ taste for debt has increased from previous generations.

“A 30-year-old today has a higher propensity to borrow, and a lower propensity to save, than a 30-year-old person 10, 15, 30 years ago,” said Benjamin Tal, deputy chief economist at CIBC World Markets. “There’s a change in behaviour.”

The extended period of low interest rates has, indeed, gotten consumers comfortable with cheap borrowing. But Mr. Tal said another key factor has been the slow pace of income growth over the past decade.

“We are a generation that was unable to duplicate the income growth of our parents,” he said. “The income is insufficient to finance what you need and what you want.” As a result, “We use credit to supplement our income,” he argued.

Queen’s University business professor Nicole Robitaille, who specializes in consumer behaviour, isn’t convinced the modern consumer is any more debt-happy than his or her parents or grandparents. But this generation has much more, and faster, access to the temptations than any generation before it.

“Credit is just so accessible to us now. It’s very, very easy for us to get lines of credit, to get mortgages, to get credit cards,” she said. “I don’t think it used to be as prevalent, how much people could take on. I think if our parents’ generation would have had the same access, they probably would have made the same mistakes.”

Statistics show, too, that as the world of consumer commerce becomes increasingly cashless, customers are more likely to whip out their credit cards than ever before. A recent study by the Bank of Canada shows Canadians used credit cards for 31 per cent of all store transactions in 2013, up from just 19 per cent in 2009. Meanwhile, the use of cash has fallen to 44 per cent of all transactions from 54 per cent.

(Canadians are also willing to pull out the credit card for increasingly small purchases; the average price per credit-card transaction fell by 15 per cent from 2009 to 2013, to $34.)

Experts in consumer psychology say the use of credit cards and, increasingly, other forms of online and electronic payments has weakened the negative emotional response that people get from spending money, since they no longer see their pile of cash shrink as they acquire goods. That has made overspending more painless.

“It’s an emotional experience, when you’re paying with cash. That provides some checks and balances,” said financial psychologist Brad Klontz, a professor at Kansas State University. “We’re not even using money any more, we’re swiping cards – it becomes unconscious.

“The more distant you can be from what you’re doing, the less likely you are to think of the consequences.”

Still, Canadians are not the credit-happy spendthrifts we are often made out to be. Bank of Canada data show that the pace of growth of “consumer credit” – credit cards, lines of credit and non-mortgage loans – has generally been in decline for most of the past decade, and is hovering near two-decade lows. Total national credit-card debts grew by just 20 per cent in the seven years from 2005 to 2012, according to Statistics Canada – an average of less than 3 per cent a year. And since 2012, total credit-card debt among Canadians has been essentially flat. But the big boom in consumer debt has been the banks’ great consumer lending leap of our generation: Consumer lines of credit. In 1999, they accounted for less than 6 per cent of all household debts. By 2012, real credit-line debts had more than quadrupled in value, and made up 11 per cent of household debts. The median outstanding line-of-credit balance is nearly triple what it was in 1999.

“I don’t think we’re dumber, I don’t think we have less self-control. But I think we have more ways to make bad decisions now,” Prof. Robitaille said. “I don’t think we’re sophisticated enough to take on all of what is available to us.”

The Big Six aren’t too worried

Lenders have played a large role in Canada’s household debt expansion – making consumers a much bigger focus of their lending strategies.

Twenty years ago, Canadian banks’ outstanding loans to households (both consumer and mortgage lending) were roughly double the size of their business loan portfolios. Today, those household loans are three and a half times the size of the banks’ business loans. Household loans have increased nearly sixfold in value, to more than $1.4-trillion.

In 1970, household credit accounted for just one-third of all lending in Canada, according to Statistics Canada data. By the 1980s, it had crept over 40 per cent. Today, household credit makes up more than half of all lending in this country.

Canadian banks have been happy to cater to consumers’ insatiable appetite for debt. The reason is simple: Consumer loans are highly profitable and default rates are minuscule.

In 2014, the big six Canadian banks made a collective $33-billion in net earnings from a variety of business lines that include wealth management, insurance and capital markets. Their personal and commercial banking lines, which include mortgages, credit-card debt and personal loans, drove about half of those earnings – underscoring the importance of consumer debt to the banks’ bottom lines.

At Royal Bank of Canada, the portfolio in residential mortgages has grown to $194-billion, or about double the size since 2006, the year before the start of the financial crisis. Toronto-Dominion Bank’s residential mortgages have grown to more than $175-billion, more than tripling since 2006. Over the same period, TD’s credit-card loans have risen nearly sixfold.

But bank chief executives don’t see any looming crisis in consumer debt – or, more to the point, their banks’ financial exposure to it. CEOs have expressed little concern about the housing market in particular. Royal Bank of Canada’s Dave McKay and Toronto-Dominion Bank’s Bharat Masrani said this year that the housing market looks relatively healthy, with prices rising because of a shortage in single-family homes and a growing population.

“For TD, we are very happy with our mortgage business. With our underwriting standards and all the stuff we do, we are quite comfortable with how this impacts the bank,” Mr. Masrani said after the bank’s annual general meeting in March.

And why wouldn’t bank chiefs feel comfortable? For all the worries about record-high consumer debt burdens, the number of Canadians falling behind on debt payments isn’t raising any alarms.

The Canadian delinquency rate on Visa and MasterCard credit cards fell as low as 0.75 per cent last year, tied for the lowest rate for data going back to 2004.

Mortgage holders look even better. According to the Canadian Bankers Association, only 0.29 per cent of residential mortgages were in arrears at the start of 2015 – meaning that just one in every 345 mortgages are going unpaid for three months or more. The rate has fallen for six straight years, and is now close to the lowest rate seen in the past decade.

In the United States, the rate of mortgages in arrears is nearly eight times higher than Canada’s, at 2.3 per cent, according to the Mortgage Bankers Association, and that figure doesn’t include foreclosures. In Britain, the value of mortgage payments in arrears for more than three months, while falling, is 1.33 per cent of total payments, according to the Council of Mortgage Lenders.

CIBC’s Mr. Tal said Canada’s big increases in mortgage debt don’t look like a problem because the real estate assets backing those mortgages have soared, too. (Indeed, household debts as a percentage of total assets has declined since the financial crisis, although it is still modestly elevated compared with precrisis levels.) But the problem, he said, is what would happen if those property values – estimated by the Bank of Canada at as much as 30-per-cent overpriced – were to suffer a sizable fall to earth.

“Asset prices can go down,” he said.

Canadian banks haven’t forgotten that conditions can change, but they believe the potential downside, for them at least, is limited. In conference calls with analysts after their quarterly earnings in February and March, the banks said that they had conducted stress tests on their lending portfolios – in some cases looking at the impact of a 20-per-cent decline in home prices and a surge in the unemployment rate by five percentage points. Even these dire scenarios failed to tip them into a hypothetical crisis.

“All kinds of different things can happen in this world, but when we run our various stress tests, we fall within our risk appetite,” said Laura Dottori-Attanasio, chief risk officer at Canadian Imperial Bank of Commerce, during a call with analysts.

Reducing sensitivity a necessity

As for consumers, it has long been assumed that the inevitable slow rise of interest rates, back to more historically normal levels, would put the desired chill on borrowing. But that long-awaited rate upturn remains elusive, now years after it had first been predicted, as a sluggish global economy still demands that central banks, including Canada’s, keep the rate-stimulus tap wide open. The most recent Bank of Canada rate cut was just four months ago. The yield on five-year Canadian government bonds, despite recent modest gains, is barely above a historically puny 1 per cent. Mortgage rates are at historic lows.

The Bank of Canada won’t find it easy to get interest rates back up to more normal levels because easy credit has shifted future consumption to the present, according to Mr. Dodge, the former governor of the central bank. Canadians are buying on credit today what they wouldn’t normally have been able to afford if rates weren’t so low.

“The problem is that the last movement in rates was down, rather than up, and we know that over time [the bank is] going to have to get those rates up,” Mr. Dodge explained. “That’s where the real risk comes. This adjustment period is going to be very tricky because we’ve brought forward a fair bit of consumption in time and there will be a gap as households adjust to higher rates, which are going to come eventually.” That “gap” implies that a lengthy stall-out of consumer spending could be on the way when borrowing costs begin to climb. And given the sheer size of the consumer debt out there, rates wouldn’t have to rise by much for the broader economy to feel a serious pinch.

“When it starts going up, even 50 basis points [i.e. one-half of a percentage point] would be huge,” warned CIBC’s Mr. Tal. “Never before have we been so sensitive to higher interest rates.”

Shifting priorities


CMHC insures interest-only mortgages and mortgages with 30- and 35-year amortization, up from 25 years.

Later bumped up to 40-year amortizations, on 100-per-cent interest loans.

CMHC insures home equity lines of credit for first time.


Amortization period reduced to 35 from 40 years.

Minimum down payment of 5 per cent for new government-backed mortgages.

Limit for total debt service ratio at 45 per cent.

620 minimum credit score requirement.

New loan documentation standards.


Must meet standards for five-year fixed-rate mortgage.

Minimum down payment of 20 per cent.

Maximum refinancing limited to 90 per cent of home value from 95 per cent.


Amortization period reduced to 30 from 35 years.

Maximum amount Canadians can borrow in refinancing their mortgages lowered to 85 per cent of the value of their homes from 90 per cent.

CMHC stops insuring home equity lines of credit.

Financial institutions assume risk for defaults, and eligibility requirements tightened up.

CMHC stops insuring lines of credit secured by homes, including home-equity lines of credit.


Amortization period cut to 25 years from 30 years.

Maximum Canadians can borrow when refinancing their homes cut to 80 per cent from 85 per cent of home’s value.

Government-backed insured mortgages no longer offered on homes worth more than $1-million.


Banks, credit unions and other mortgage lenders restricted to a maximum of $350-million of new guarantees.


CMHC discontinues mortgage products for second homes and the self-employed, without third-party income validation.