Rate hikes may mean half million foreclosures

Over 600,000 Canadians will struggle to make their mortgage payments if their rates rise by just 1%, according to the seventh Annual State of the Residential Mortgage Market report by the Canadian Association of Accredited Mortgage Professionals (CAAMP).

Recognizing that interest rates cannot stay at historic lows forever, many are bracing for higher rates. But 3% said they could afford no increase in their monthly payment, while another 5% said they could afford an increase of up to $99.

Of the 5.80 million mortgage holders in Canada, roughly 650,000 (12%) would be challenged by rate rises of less than 1%.

Overall, the average amount of room for increase is $750 per month on top of current costs, with 68% saying they could manage an increase of more than $300 a month. Eighty-four percent said they could handle an increase of $200 per month in their mortgage payments.

While nearly half (46%) of respondents agreed that Canadians have too much debt, the majority didn’t think their own debt load was a problem. There is also a strong sentiment that low interest rates have allowed people to buy homes that probably should not have bought them.

In spite of that sentiment, there was similar agreement that real estate is a good investment and that mortgage debt is “good debt”. Only seven percent agreed strongly with the statement that they personally regretted the size of the mortgage they took on.

In this extended period of rock bottom interest rates, it comes as no surprise that Canadians have largely sought out new lower rates on their mortgages. Twenty three percent renewed or refinanced in the past year and 78% of those secured a lower rate—on average, 1.46% lower.

“Overall, our survey paints a picture of Canadians generally and homeowners in particular as very focused on their finances,” said Jim Murphy, president and CEO of CAAMP. “They are planning ahead, aggressively paying down their mortgage in advance of any further economic jolt

There’s some good news on the home equity front: only 10% of mortgage holders took out equity in the last year, a 40% drop from 2010. Of those that did tap their home equity, the average amount is estimated at $49,000.

Seventy-eight percent said they have at least 25% equity in their homes. The study estimates that the total value of owner-occupied housing in Canada is $3.017 trillion, with mortgages and lines of credit on these homes totaling $982 billion. That leaves $2.035 trillion (68%) in home owners’ equity.

“Despite less than positive feelings towards the economy, or maybe because of that, Canadians are showing a level of prudence in their decisions that is inspiring,” said Murphy. “That suggests to us that there is no need for policy makers to introduce new measures that would reduce housing activity.”

When asked if they were concerned about a downturn in Canada’s housing market in the next year, the responses were far from optimistic. On a scale of 1 to 10, with 10 being complete agreement with the statement, responses averaged 5.84.

“Opinions are close to neutral on this question. But, for this statement, we would hope to see a high level of disagreement,” the report says. “These responses suggest weak confidence about housing market prospects.”

Across the country the weakest confidence levels were found in Quebec, Saskatchewan, Ontario and Manitoba. The strongest confidence levels were in Atlantic Canada, followed by Alberta and British Columbia.

For the full report, click here.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.