Housing markets are stable and healthy in most of Canada we're told, and Canadian homeowners are comfortable with their current mortgage. How comfortable? So much so most are focusing on reducing their mortgage faster by making lump sum payments, reducing amortization periods and refinancing with lower interest rates, suggests the Canadian Association of Accredited Mortgage Professionals' (CAAMP) most recent report, "Confidence in the Canadian Mortgage Market."
"The Canadian mortgage holder, consumer-borrower, is heeding the advice that they're getting and reading or hearing about from the Bank of Canada and Ottawa. They're listening to what's being said about household debt and potential interest rate increases on mortgages," says Jim Murphy, president and CEO of Toronto-based CAAMP. "We're seeing mortgage holders make increased payments … that's a good thing.
The more prudent nature of borrowers is reflected in a decline in the arrears rate, Murphy says, but he cautions the ultra-low interest rate environment we're in means Canadians should be mindful of the consequences of taking on a large mortgage that will become more expensive to service once rates rise.
"We've done some previous stress tests on what the impact of rising rates might be and there's a small percentage of households, one or two per cent, that would be impacted by rising rates of a percentage point or two," he says. "That's obviously a concern."
Are we getting the message on debt?
By now the message to Canadians has been received loud and clear: household debt is bad. And yet fresh data suggests we're continuing to pile on consumer debt, albeit at a slower pace. Perhaps not in the form of mortgage debt but all the same, a TransUnion quarterly report on non-mortgage debt finds the average consumer added $69 in non-mortgage debt during the first three months of 2012 from the previous quarter to bring outstanding debt to $26,029.
Moreover, the Bank of Canada remains concerned about Canadian household debt as it continues to grow thanks to our record low interest rates.
The CAAMP survey asked Canadians how concerned they are with the level of Canadian indebtedness as a whole, and the overall level of debt they hold personally. On a 10-point scale (10 being very concerned), they indicated an average of 7.3 regarding Canadian indebtedness as a whole.
However, when asked about their own level of indebtedness, only a quarter of respondents were concerned. Canadians, it seems, are much more worried about other people's debt levels than with their own.
"There seems to be this disconnect between concerns about overall household debt. I think a lot of that is due to people reading about it in the media and then they look at their own situations and they seem to be comfortable," he remarks. "Hopefully those individuals know their own situation and what they can handle, the type of (financial) product they took out, and with effective rate increases happening on them. People need to be mindful of that."
Paying off mortgages early a priority
Mortgage holders, particularly those who purchased homes recently, are making considerable efforts to accelerate repayment of their mortgage. The survey finds that 23 per cent of mortgage holders have increased their monthly payments during the past year. In addition, 19 per cent have made lump sum contributions to their mortgage in the past year, and 10 per cent have done both.
"Most first-time buyers do fixed-rate mortgages. When you're in a fixed-rate, you have features such as being able to double-up on payments," he explains. "People that have amortizations of greater than 25 years, they're expecting to pay about 30 per cent less for the time period of the mortgage."
For mortgages on homes purchased between 2008 and the present with extended amortization periods, the average expected amortization period of 22.8 years is considerably shorter than the original contracted periods of 31.9 years, 30 per cent of the original contracted period.
For those who voluntarily increased their regular payments, the average amount of increase was $400-$450 per month.
There are approximately 5.85 million mortgage holders in Canada and roughly 1.35 million of them voluntarily increased their payments, resulting in a combined amount of about $7 billion per year. Lump sum payments averaged $12,500, and with about 1.1 million people making these payments, this produces a combined repayment estimated at $13.75 billion.
Among borrowers who renewed a mortgage in 2011, almost 75 per cent saw a reduction in their interest rate. And even though some borrowers didn't experience a rate decrease in 2011, Canadians are only facing an average rate of 3.88 per cent (for fixed-rate mortgages), well below the average posted rates of 5.37 per cent over a five-year term, the report reads.