Mortgage Debt in Canada

Wednesday, August 22, 2012

According to the Canadian Real-Estate Association, the average house price in Canada has increased by 98% since 2001, and by 35% since the beginning of 2009.  However, this has not prevented numerous Canadians from taking out mortgages to buy their homes and the country’s mortgage debt passed $1 trillion for the first time in 2009.

This is accordingly a good time to assess the status of Canada’s mortgage debt, with particular focus on the downside and upside of so much debt.

The Downside of Canadian Mortgage Debt:

  • With banks offering historically low interest rates of below 3%, numerous Canadian home buyers have been encouraged to take out large long-term mortgages.  The problem arises as borrowing costs may rise in the future and people who can afford their payments now will not be able to afford them anymore. A March 2012 Bank of Montreal study found that more than 40% of Canadians thought they would struggle to afford their payments in the case of a 2% interest rate increase.

  • Canadians now have about $1.1 trillion in mortgages on their homes, and about $200 billion in home equity lines of credit which allow them access to the equity in their homes.  In the past year, Canadians took out $46 billion in equity, of which a third was used for home renovations and a quarter for debt consolidation.  This basically means that Canadians are borrowing further in addition to the mortgages they already have, with a quarter of them already in debt and at least some of them spending it on inessential renovations.  If for some reason the value of their homes should drop in the future, and they have difficulty paying the mortgage, then they will indeed be in serious trouble.

  • Canada’s household debt relative to disposable income rose to a record high 154.3 percent in the first quarter of 2012, which is higher than the same statistic in the United States and Great Britain.  The vast majority of that debt is mortgage debt.  In fact, the ratings agency, Equifax Canada, found that mortgage holders were moving their credit card debt to their equity line of credit to utilize the lower interest rate.  This means that they are not paying off their credit card debt, but simply continuing to buy on credit and pushing the debt into their mortgages.

The Upside of Canadian Mortgage Debt:

  • Between 2008 and 2011, the Canadian government reduced the period a mortgage could be repaid from 40 to 30 years. In June 2012, they announced that they were reducing it further to 25 years.  This means that banks will not be able to entice Canadians with long-term low interest loans. People will have to borrow less and pay it off sooner.

  • In June 2012, the government announced that they were capping mortgage payments at 39% of a family’s monthly income, which rules out situations where families live off credit, especially equity line credit, simply because their mortgage payments are too high to afford.

  • The Canadian Association of Accredited Mortgage Professionals (CAAMP) found in March 2012 that an increasing number of borrowers who started with variable rate mortgages are now moving to more secure fixed rate arrangements.

  • The CAAMP report also discovered that Canadians were making an effort to reduce their mortgage debt.   19% of respondents said that they had made lump sum payments, 23% said that they had voluntarily increased their regular payments and 10% said they had done both. About half of all mortgage holders pay at least $100 more a month than is required by their minimum payment.

But one has to think about buying a home in the first place.  Is a home an investment or a liability?  Do Canadians ever really own their home?  For those that have a mortgage of $350,000 for 25 years, with even limited interest at 3%, think about the extra money that you have to pay just to borrow to finance the ownership. 

So, if you haven’t signed up to have a mortgage, do you think that you will?  What if you have mortgage debt?  What would you do if interest rates were to rise?  Having a plan might help you in case this should ever happen.