By Susan Pigg
Moneyville
Canadians are “well positioned” to weather a rise in interest rates and are heeding the warnings from Ottawa about the risks of being house poor, according to a new study that provides a fascinating glimpse of mortgage indebtedness.
Some 83 per cent of Canadians have at least 25 per cent equity in their homes and homeowners are making significant efforts to get out of debt early with 23 per cent increasing their monthly payments, 19 per cent making lump-sum payments and 10 per cent doing both.
The average increase in payments is $400 to $450 per month, resulting in a combined $7 billion worth of voluntary extra payments per year among Canada’s 5.85 million mortgage holders, according to a survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP), the national association for some 12,500 mortgage brokers.
Lump sum payments averaged $12,500, amounting to a combined $13.75 billion worth of fast-tracking mortgages, says the report released Wednesday.
Despite wildly escalating house prices, especially in major centres like Vancouver, Toronto and Calgary, the average outstanding principal is just $170,000, according to the report authored by economist Will Dunning.
There are currently about 9.85 million homeowners in Canada and just under 6 million of them have mortgages. While 3.75 million may be mortgage-free, they may have other debt not reflected by the study.
Perhaps not surprisingly, most of those surveyed feel comfortable with their own level of debt — but they worry about others.
“There’s a bit of a disconnect there,” acknowledges Jim Murphy, president and CEO of CAAMP. “But the research tells us that people can handle it (their mortgage debt.) There is a small minority — maybe one or two per cent — who would have trouble if interest rates start to rise.”
Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have been unrelenting the last few months in their warnings about the historically high levels of household debt and have made significant moves to rein in the ability of Canadians to borrow with abandon.
Banks have been warned to be responsible in their lending and home equity line of credits have also come under the microscope as Canada’s housing boom has helped turn homes into virtual ATMs to finance home renovations, investments and indulgences like travel.
Canadians currently have $994 billion in outstanding mortgages on primary residences. They owe some $161 billion in Home Equity Lines of Credit (HELOCs.)
Just in the last year Canadian homeowners have taken out $46 billion in HELOCs, with $17.25 billion used to finance renovations, $10 billion to fund investments and $9.25 billion for debt consolidation, says the survey, Confidence in the Canadian Mortgage Market.
The report notes that Canadians with HELOCs have an average of 82 per cent equity in their homes while those with a combination of mortgages and HELOCs have an average of 41 per cent equity in their homes.
“Generally the numbers are very good. We’re not the United States. We’re not Spain,” says Murphy. “But we need to be mindful that we’re not always going to be in a low interest rate environment and that it’s always good to pay down your mortgage and live within your means.”
For the first time, the annual spring survey also took a look at the rental market, asking why more renters aren’t buying: 52 per cent cited the inability to cobble together a down payment.
And it issued a subtle warning to Ottawa, which has already tightened up bank mortgage and amortization rules and fears persist that there is more to come, including an increase in minimum down payments.
“Data gathered in this study suggests that if the minimum down payment in Canada was 10 per cent rather than the current 5 per cent, during 2007 to the present, home purchases might have been 100,000 units per year less than they were,” the survey says.
The fallout could have hurt the construction industry, house prices — which may have fallen — reduced consumer confidence and created a tighter rental market with increase rents.
“It is essential for the health of the housing market, and therefore for the broader Canadian economy, to maintain access to high-ratio mortgage funding,” it notes.