With policymakers worried about Canadian household debt levels, it appears that the debt service burden may be higher than previously estimated.
In a new research note, Scotia Economics indicates that, thanks to an accounting change, the ability of analysts to estimate principal payments by mortgage holders to banks has improved. Due to an accounting change affecting banks that became effective November 1, 2011, securitized mortgages and related securities must now be held on-balance sheet, and Scotia says that “re-captures the data on principal payments”.
Before this change took effect, approximately 27% of total residential mortgages were held off-balance sheet, it notes. Now that analysts have better data on these assets, Scotia says that interest and principal payments alone are now absorbing about one quarter of after-tax disposable income.
This can’t be compared to previous periods, since the data for principal payments through securitized conduits isn’t available, but it represents a jump from previous estimates of less than 20%.
Moreover, Scotia notes that analysts still don’t have data on mortgage principal repayments to institutions other than banks. “Since banks represent about 75% of the mortgage industry in Canada we’re likely missing about 25% of mortgage principal repayments which would add about four percentage points to our debt service measure and thus bring it closer to 30%,” it notes.