Lending Standards Steady Amid Market Calm

Canada’s six largest banks—RBC, TD, Scotiabank, BMO, CIBC, and National Bank—have reassured investors and regulators in their Q3 earnings reports that the Canadian mortgage system remains stable, even as housing markets cool across the country.

Executives emphasized that their mortgage portfolios are anchored by high-credit-quality borrowers and low loan-to-value (LTV) ratios, averaging below 55%. This means that on average, borrowers owe just over half of their home’s value, leaving a comfortable equity cushion even if property prices decline.

This conservative positioning is a direct outcome of measures like OSFI’s B-20 mortgage stress test, first introduced in 2012, which requires borrowers to qualify at rates well above their contract rates.

Why Banks Aren’t Panicking

Borrower Credit Strength:
Canada’s big banks report that their mortgage borrowers typically carry prime credit scores, reflecting strong repayment history and low default risk.
Built-In Equity Buffers:
With LTV ratios under 55%, most households have substantial equity. Even in scenarios where home prices fall 10–15%, banks would remain insulated against widespread defaults.
Stable Mortgage Arrears:
Data from the Canadian Bankers Association shows mortgage arrears (payments overdue by 90 days or more) remain historically low at 0.15% nationwide, far below the levels seen during past housing downturns.
Prudent Lending Rules:
Strict federal regulations—particularly stress test rules—have limited overleveraging and curbed speculative borrowing.

Market Context: Cooling Housing, Strong Banks

The backdrop for these earnings is Canada’s cooling housing market. Toronto and Vancouver have both seen sales slow and prices ease as affordability pressures mount. Yet, rather than sparking systemic risks, the slowdown is being absorbed by a banking sector built on decade-long prudence.

Analysts note that while mortgage growth is slowing, the quality of existing portfolios matters more than sheer volume. For banks, lower risk of default is key to weathering market turbulence.

Why It Matters

For Canadian homeowners and buyers, these results highlight a critical point:

Borrowers are stressed, but banks are not. While households feel the pinch from higher rates and inflation, the banking system’s foundation is solid, reducing the likelihood of a financial crisis tied to mortgages.

For policymakers, the message is equally clear. Measures like the stress test—controversial when first introduced—are proving their worth by ensuring that borrowers entered the market with a margin of safety.

As the housing market cools and Canadians brace for possible Bank of Canada rate cuts, the message from the Big Six is one of calm resilience: Canada’s mortgage system remains strong, even under pressure.