Canadian mortgage risk is easing and it's all thanks to higher interest rates and tougher mortgage rules.

According to The Bank of Canada, the stress test and ever-increasing interest rates have resulted in a dramatic decline in "deeply indebted borrowers."

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Household debt is a major concern for the Bank of Canada.  To determine the pace of hikes, the bank closely monitors the rate at which households adapt to higher borrowing costs.

Apparently, Canadians are adjusting quite well.

According to the bank, which has already raised interest rates five times since the summer of 2017, Canadians have adjusted their spending in response to the hikes and policy changes.

"The number of new highly indebted borrowers has fallen, and overall mortgage activity has slowed significantly," bank staffers Olga Bilyk and Maria teNyenhuis wrote in a release. "Tighter policies around mortgage qualification and higher interest rates are having a direct effect on the quality and quantity of credit."

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The bank also noted household vulnerabilities are on the decline while credit growth is on track to moderate. Stricter mortgage rules are credited for both improvements.

Year-over-year, the number of mortgages granted to highly indebted borrowers has dropped 39 per cent.

Two years ago, the federal government set in place tighter criteria for mortgage qualification to reduce Canadian mortgage risk. Rules tightened even more in Oct. 2016 when the stress test was implemented.

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The stress test helped reduce the proportion of new high-leverage, insured loans (exceeding 4.5 times a borrower's annual income) from 20 per cent to 6 per cent between the fourth quarter of 2016 and the second quarter of 2018.

In a statement, Bank of Canada senior deputy governor Carolyn Wilkins said, the debt-to-income ratios of households remain “really high,” but are stable and on track to decline.

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