The Bank of Canada recently released a report highlighting the recent policy changes on the Canadian mortgage market. While the report highlights the positive influence of the mortgage stress test and the overall de-risking within the banking system, these vulnerabilities have not disappeared but have been transferred from the traditional banking system and into the shadow banking sector.

Per the report, the share of new uninsured mortgages going to highly indebted borrowers, those with loan to income ratios above 450% (4.5 times income) dropped to 13% in the second quarter of this year, down from more than 18% last year.

However, while those numbers fell nationwide, they remain elevated in Toronto and Vancouver. The share of new uninsured mortgages with a loan to income above 450% sits at 38% in Vancouver and 28% in Toronto. Compare this to the less leveraged cities of Ottawa and Montreal which sit at 8% and 9% respectively.

mortgage conditions
Share of new mortgages with a loan to income above 450%.

While the Bank touts, “The overall riskiness of new mortgages has therefore decreased because the proportion of risky borrowers has declined across cities.” They also estimate the share of new mortgages originated through private lenders has grown, particularly in Toronto where private lenders grew from 5.9% to 8.7% year over year. This is a conservative growth rate, and is only an estimation from the Bank. Private lender growth has been booming off the use of Home Equity Lines of Credit.

This shift towards private lenders is typical of a late cycle move, as banks begin tightening and credit conditions deteriorate. While the federally regulated banking system may be de-risking, one could certainly argue risk are mounting across the rest of the lending landscape as borrowers funnel into shorter term loans at higher rates.