Photo: James Bombales

Canada’s overall consumer debt continues to rise, spurred in part by an increase of uninsured mortgages.

And this increase in the proportion of uninsured mortgages is leaving Canada’s seven largest banks at risk of higher consumer lending vulnerability, according to a new report by Moody’s Investors Service published today.

Until now, low interest rates and unemployment have kept Canadian borrowers’ debt-servicing requirements manageable.

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However, the credit ratings agency says consumers’ debt-servicing requirements will likely rise after recent interest rate hikes by the Bank of Canada.

“High and rising household debt-to-income levels leave both borrowers and lenders vulnerable to an economic downturn, despite strong consumer credit quality metrics to date,” reads the report.

In the third quarter of 2017, the national household debt-to-disposable income ratio reached a record 171 per cent.

Although residential mortgage risk remains low, Moody’s says that the proportion of uninsured mortgages, including home equity lines of credit, has climbed to 60 per cent from 50 per cent five years ago.

The firm attributes this change to a variety of “macro-prudential measures” aimed at slowing house-price appreciation in Canada, such as mortgage stress testing.

“The decline in insured mortgages is a direct result of the Canadian government’s decision to restrict supply and increase premiums,” reads the report.

With interest rates on the rise, Moody’s notes that mortgage-servicing costs are likely to climb because nearly half of outstanding mortgages are due for interest rate renewals within a year, adding further strain on households’ debt-servicing capacity.

Out of Canada’s largest seven banks, CIBC has the largest exposure to Canadian residential mortgages and the greatest proportion of uninsured mortgages.

In addition to a rise in uninsured mortgages, Moody’s says other risks to the banks include credit card losses and longer auto loan terms.

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