Ryan Wright is trying to do everything right. He puts away money for retirement, he bought a hybrid car to cut down on fuel costs, and he has diligently paid down his mortgage since buying a modestly priced Ottawa townhouse five years ago.
And when it came time to renew his mortgage this year, he locked in with a five-year deal rather than risk the uncertainty of higher interest costs in the next few years.
Mr. Wright’s caution puts him in the minority: A report from the Canadian Association of Accredited Mortgage Professionals released Wednesday suggests a majority of Canadians think they can spend at least $300 more a month on mortgage payments without having to alter their lifestyles.
“Would we have the income available to put up hundreds of dollars more against our mortgage?” Mr. Wright said. “Yes. But we would have to dramatically drop our savings and other ‘luxuries’ like eating out once a month.”
Interest rates have been held at historically low levels since the recession, as central banks attempt to stimulate the economy and keep borrowing costs down. Cheap money has been largely credited for fuelling demand for Canadian housing, and there have been warnings that prices have increased too rapidly as buyers take on more than they could afford in a normal rate environment.
The report found that a “sizable minority” of Canadian mortgage holders would be unable to make their payments if interest rates were to increase by even 1 per cent.
“A vast majority of mortgage holders has considerable capacity to afford rises in mortgage interest rates,” says the trade group’s annual report on the state of the Canadian mortgage industry. It suggests the average mortgage holder could absorb another $750 a month in monthly payments. “There is a sizable minority of about 650,000 [people]who would be challenged by rate rises of less than 1 per cent.”
“Obviously, that average has been pulled higher by some high-income individuals with a lot of spending room,” said Jim Murphy, the association’s president. “The typical family has room for about $300 in extra payments.”
About 75,000 have “limited home equity,” making them even more vulnerable if rates change, the report said.
The report plays down the significance of the numbers, however, saying that most have fixed mortgages and “by the time their mortgages are due for renewal, their financial capacity will have increased and the amount of mortgage debt will be reduced.”
The trade group’s survey, however, paints a fairly rosy picture of the $982-billion Canadian mortgage market. About 5.8 million Canadians hold a mortgage.
“Overall, our survey paints a picture of Canadians generally and homeowners in particular as very focused on finances,” Mr. Murphy said. “Prudent is the word that sums up how Canadians are feeling at this time.”
Amid warnings from the Bank of Canada and political leaders about increasing consumer debt loads, the report said only 10 per cent of homeowners took out home equity loans. And while 46 per cent of Canadians feel that the average family is carrying too much debt, almost 80 per cent indicated that they “personally have acted responsibly.”
The Bank of Canada recently warned that household debt loads remain too high and could translate into lower spending on consumer goods – bad news for the economy. More ominously, the bank noted that a “sudden” weakening in the housing market could have “sizable spillover effects” elsewhere in the economy.
See the report here.
By the numbers:
3.92% Average interest rate on a Canadian mortgage over the past year, down from 4.22 per cent a year earlier.
23% Estimated portion of mortgage holders who refinanced in the past year; they saw their rates drop by about 1.2 per cent.
60% Portion of mortgages issued in past year that were fixed-rate mortgages (locked in for a specific time period).
40% Decrease in number of mortgage-holders who tapped into their home’s equity in the past year, compared with previous year.
68% Portion of Canadians who say they can afford to pay at least $300 more per month on their mortgage.
3% Portion who say they can’t afford any increase to their mortgage.
Source: Canadian Association of Accredited Mortgage Professionals