We're Getting The Message About Debt
by Jim Adair
Thursday, June 28, 2012
For the last few years, the Bank of Canada and the federal finance minister have been constantly reminding Canadians that household debt levels have hit a record high. The decade-long housing boom, fuelled by the lowest mortgage interest rates ever, has produced thousands of new homeowners. The housing market contributed greatly to helping Canada weather the global financial crisis.
Throughout it all, naysayers warned that the end of the housing expansion was near and that a U.S.-style housing crash was imminent. The government took action to slow the market by introducing tougher standards to qualify for an insured mortgage and by reducing amortization rates to a maximum of 30 years. All the while, the Bank of Canada continued to warn that interest rates must soon begin to rise.
Two new surveys show that Canadians have been listening, and while they've continued to buy homes and show confidence in the long-term future of their real estate investments, they've also been cautious about the debt load.
A survey by Leger Marketing for BMO Bank of Montreal shows that 54 per cent of Canadians with debt say they will be debt-free within the next five years. The report says 70 per cent of Canadians say they can afford to pay more than their minimum payments.
A report from the Canadian Association of Accredited Mortgage Professionals (CAAMP) says that during the last year, 23 per cent of mortgage holders have increased their monthly payments and a further 17 per cent had increased their payments in previous years. Nineteen per cent of mortgage holders have made a lump sum payment on their mortgage during the last year. Ten per cent have been able to make both a lump sum payment and increased monthly payments.
"Borrowers are taking prudent advantage of current low interest rates – they are leaving themselves considerable amounts of budgetary room, which they can use to accelerate repayment and/or accommodate future rises in interest rates," says CAAMP economist Will Dunning in the report. He also says borrowers who have been choosing longer amortization periods for their mortgages "are often acting to give themselves flexibility to manage future uncertainties, rather than out of need."
An analysis of consumers' actual mortgage payments versus the amounts that might be required by the amortization schedules shows borrowers are paying more than required, says Dunning. He says the "surplus" payments are estimated to average about $250 per month or $3,000 per year.
The BMO study says the average household debt load in Canada, including mortgages, credit cards, lines of credit and other loans, is $112,329. It says 25 per cent of Canadians are debt-free, but 41 per cent say they have taken on more debt in the last five years because of increased spending. The average monthly debt payment is $1,138.49.
"After the lengthy run-up of the past decade, it's encouraging that many Canadians are planning to rein in their debt, as interest rates won't stay low forever," says Sal Guatieri, senior economist with BMO Capital Markets. He says household credit growth recently slowed to five per cent, from the nine per cent clip that it was climbing at during the last 10 years.
Residential mortgages represent about 63 per cent of household debt.
CAAMP says during the last year, the number of mortgages in arrears in Canada has fallen. It is currently about 0.38 per cent, which CAAMP says represents less than one in 250 borrowers.
CAAMP says most mortgage defaults happen because the borrower lost his job, or had work hours or pay rates reduced significantly. Marital breakdown is also a major cause of mortgage defaults.
BMO says that men are more likely than women to carry large amounts of debt, but they are also more optimistic about being able to pay it off. Those with the largest debt are in the 35 to 44 age group.
CAAMP's research shows that although there is concern about extended amortization periods, which twice caused the government to shorten the maximum periods, "the new data…hints strongly that over time, a large share of the borrowers will use increases in their incomes to expeditiously retire their mortgages. This should lesson concerns about the riskiness of extended amortizations."
For mortgages that have been repaid during the last 20 years, actual repayment periods have usually been only two-thirds of the contracted periods.
CAAMP says there is currently $994 billion in outstanding mortgages on primary residences in Canada, and $161 billion in home equity lines of credit. It says that unlike the situation in the U.S. before the housing crash, 83 per cent of Canadians have at least 25 per cent equity in their homes. The average amount of equity is estimated at $214,000.
CAAMP also says that although the timing of interest rate increases is still uncertain, many Canadians are ready if rates begin rising. Since many homeowners have already made increased payments and lump sum contributions to their mortgage debt, "if interest costs increase to unaffordable levels, the borrowers can often reduce their payments, within the limits imposed by the contracted amortization period."
All Rights Reserved