Experts Warn that Growing Debt Loads Could Lead to Financial Crisis

With the pandemic has driven housing prices to record-breaking highs, a new mortgage trend has some experts worried about the potential implications on Canada’s housing market – zero down mortgages.

Often associated with the U.S. financial crash in 2008, zero down mortgages allow borrowers to obtain financing without putting up money of their own for a down payment. They have experienced a resurgence in the U.S and Canada over the past year. The reason for this is that many first time buyers are being priced out of the housing market, and are unable to save for a massive down payment due to skyrocketing rent and home prices.

According to Bloomberg, high-risk mortgages that allow home buyers to borrow the money for their down payment or receive cash back after closing are now becoming the new normal. This, combined with low mortgage rates, has many policy makers and financial experts very concerned about a collapse similar to the 2008 financial crisis.

In fact, in the Bank of Canada’s 2021 Financial System Review, policy makers identified the risks of deteriorating mortgage quality.

Fortunately, Canada has regulations in place to prevent most lenders from lending to high-risk applicants. Even still, Bloomberg reports that those considered to be “low-risk” are now taking on larger debt loads than ever before and having little equity to show for it – so much so that borrowers with high loan-to-income ratio now accounts for 17% of new insured mortgages. Two years ago, they only accounted for 6.5%.

According to the Bank of Canada report, this is “the most economically significant factor associated with future financial stress.”

It’s difficult to say whether this trend will continue, or taper off as the housing market starts to cool. But with inventory increasing and home prices starting to dip across Canada, this is a positive sign of things to come for buyers.