Canadians can access much bigger mortgages today compared to 15 years ago
Amid speculation about what the Bank of Canada’s recent interest rate increase could mean for homebuyers, it’s important to remember the bigger picture—rates are historically low. Thanks to falling interest rates and growing incomes, Canadians can now qualify for more than double the mortgage loans they used to.
Recent research by the Fraser Institute finds that, between 2000 and 2016, average mortgage interest rates in Canada fell by almost two-thirds—from 7.02 per cent to 2.72 per cent. When less of a homebuyer’s monthly payment goes towards interest, more can go towards the principal. This in turn qualifies the homebuyer for larger loans, allowing them to bid up the price of a home.
The average Canadian family income in 2000 ($50,785) could qualify for a maximum mortgage loan of $180,949 at that time’s prevailing interest rate. By holding this income (and monthly payment) constant, a change in interest rates down to 2.72 per cent increases this family’s mortgage-borrowing power to $276,610—a 53 per cent jump.
If this conservative estimate produces such a substantial increase, what happens when we take into account the fact that incomes have risen since 2000?
Between 2000 and 2014 (the last year of available income data), the aforementioned $50,785 average family income grew to $77,690, amplifying the effect of falling interest rates. In dollar terms, the maximum mortgage loan this family can qualify for more than doubles—from $180,949 to $409,078.
Of Canada’s four largest metropolitan areas, this amplifying effect is strongest in Calgary, where income growth has traditionally been strong. From a mortgage-borrowing power of $230,706 in 2000, the maximum loans securable by an average Calgarian family jump by 161 per cent, to $602,700 by 2014.
Other big cities also saw large increases in mortgage-borrowing power, including Vancouver (118 per cent), Montreal (115 per cent) and Toronto (100 per cent).
Historically low interest rates combined with growing incomes enable Canadians to borrow far more than they used to. The potential impacts of newfound borrowing power can be especially pronounced in housing markets where the supply of new homes is not immediately responsive to jumps in demand. As such, if Canadians and policymakers wish to better understand strong home-price growth, they could start by looking at interest rates.