Low borrowing costs are creating a spoiled generation of homeowners who have never experienced the adversity of rising interest rates.
Renewing a mortgage? Just contact your lender to find out how much less you'll be paying. A report issued Wednesday by a group representing mortgage brokers found that people renewing in 2012 and early 2013 nailed a rate that was, on average, 0.91 of a percentage point below what they paid previously. Seventy-nine per cent of people renewing got a lower rate, while 6 per cent had no change.
Fifteen per cent of renewers had to pay more, but don't worry too much about them. "For borrowers who saw their interest rates increase at renewal, the increases were minor for most," the Canadian Association of Accredited Mortgage Professionals (CAAMP) said in its report.
Bulletin for people buying homes today: If you opt for the very popular five-year fixed rate mortgage, you will pay a higher rate on renewal. That you can bank on.
We live in a low-growth world for now, and that puts minimal upward pressure on interest rates. But history clearly shows economies don't endlessly go in the same direction, be it down, up or sideways. According to TD Economics, the yield on the five-year Government of Canada bond, a pricing benchmark for five-year mortgages, will rise from current levels around 1.3 per cent to 1.9 per cent in 2014, 2.6 per cent in 2015, 3.4 per cent in 2016 and 4.1 per cent in 2017. That's a projected threefold increase over the next four years.
The CAAMP report's main thrust is that the tougher mortgage-lending rules introduced by the federal government last summer will curtail housing starts, slow the resale housing market and cost jobs. But it also works hard to suggest that the big run-up in mortgage debt over the past few years is of no great concern.
One reason is that borrowing costs have been falling. CAAMP's study says the average interest rate for a homeowner's mortgage has fallen to 3.52 per cent from 3.64 per cent a year ago. Today, the average rate on a renewal is 3.15 per cent; for homes bought in the past 14 months or so, the average rate was 3.22 per cent.
Mortgage rates have more or less declined for the past 30 years, but most of that can be explained as the reversal of a surge to absurdly high double-digit rates caused by rampant inflation. It's the mortgage rate decreases of the past five years that lull people into thinking interest rates are an uncertain but basically benign variable in deciding to buy a home.
Baby boomers who owned homes in the late 1970s and early 1980s know about the adversity of rising interest rates. Bank of Canada data show the posted five-year mortgage rate jumped from 10.25 per cent to 21.75 per cent over a three-year period (1978-81). With inflation in Canada now running at 0.4 per cent, rates hikes like that are unimaginable.
Rates will rise, though. What happens then to homeowners who have only known low mortgage rates? CAAMP did a survey in January, 2012, that concluded homeowners have "very substantial room to absorb higher interest rates." But the ability of people to keep paying their mortgages is not really in question if rates rise. All mortgage lending is based on the assumption that if people are financially stressed, they will pay their mortgage first.
Pay your mortgage at the expense of savings? That's not my warning of what's coming for rate-hike virgins, but rather a summing up of the current financial situation for many Canadian families as portrayed in some numbers issued Wednesday by the Certified General Accountants Association of Canada.
A survey commissioned by the association found that three in 10 households find it tough to save money because they're so burdened by day-to-day expenses. One-quarter of households never or almost never manage to save money, and 80 per cent said they may dip into their savings in the next three years. This is not a strong foundation for defending against rising interest rates.
Still, there's some reason for optimism on how families will cope with higher rates. CAAMP's data suggest that close to one in five mortgage holders made a lump sum payment in the past year, and that a similar number voluntarily increased their mortgage payments.
Shrink your mortgage balance as much and as quickly possible. That's how you prepare for the adversity of higher interest rates.
Got a mortgage question? E-mail me. Then join mortgage broker David Larock and me at noon on May 23 for a Google hangout. Check here for more details.
Rob Carrick