rose by 41.2 per cent from a year ago when the country was grappling with the first wave of the pandemic. In terms of dollar value, in the month of March, Canadians borrowed $12.9 billion in mortgage debt, while another $17.7 billion was taken in home loans in April, the highest monthly figure ever recorded.
While this record-breaking rise in mortgage debt may have been prompted by today’s low interest rates, however, they cannot last forever. The Bank of Canada has already signalled the possibility of the current all-time low rate of 0.25 per cent being increased overnight. Accordingly, considering the Canadians’ high levels of non-mortgage debt, a rise in interest rates would undoubtably prompt concern among householders.
However, there are several reasons why Canadians should not begin to panic yet. When talking about a housing crash, the first incident that would be recalled to mind is the collapse of the US market during the 2008 financial crisis. The main cause of America’s pre-crisis housing frenzy was the lack of lending standards. However, this not the case in Canada. Lenders in the North American nation are famously conservative and often do not lend if the borrower does not possess the right balance of income or creditworthiness. In the case of lending standards, the country’s mortgage stress test also plays a crucial role in ensuring borrowers don’t wind up underwater. As of June 1, loan applicants were required prove their ability to afford an interest rate of 5.25 per cent, regardless of the mortgage rate offered by their lender.
Finally, and more importantly, homebuyers can breathe a sigh of relief as it would be safe to say the Bank of Canada would not rush to raise interest rates. As the manager of the health of Canada’s economy, the central bank is aware that an overnight rise in rates would not just destabilise the housing market, but would also derail the post-pandemic economic recovery as this would result in a sudden increase in the cost of borrowing for everyone.
