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Mortgages holders in strong position
Jul 12, 2010
A survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP) says Canadians appear well prepared to face the new phase of the residential mortgage market in which interest rates are rising and house activity is expected to ease.
The survey found:
• Consumer concern about rising rates is offset by increasing home equity.
• Many mortgages were renegotiated at lower rates; amortization periods are declining.
• Many Canadians have used cost savings from low rates to pay more than required, providing flexibility to deal with mortgage rate increases.
• Mortgage debt is a priority — the vast majority of Canadians have never missed a payment.
• A high percentage of Canadians still believe it is a good time to buy a home.
The report, entitled Prudence Paying Off For Canadian Mortgage Borrowers, was written by CAAMP chief economist Will Dunning and based on information gathered by Maritz Research Canada in a survey of Canadian consumers conducted in April.
Canadians are positive about the housing market in their communities, but only 3.4 per cent said they were very likely to buy, suggesting activity may slow during the remainder of this year. This number is slightly lower than that of previous surveys.
Still, Canadians across the country are bullish about house prices. Almost one-half of those surveyed expect prices to rise, and 44 per cent expect them to remain stable. These numbers, when tabulated with previous survey results, show the highest number of Canadians indicating they expect house values to increase rapidly. Previously, attitudes varied between provinces, but this spring, optimism is nationwide, according to CAAMP.
The report simulates the impact of mortgage rate increases up to 5.25 per cent and finds that about 375,000 mortgage holders are already challenged by their current payments, and another 475,000 might be if their rate rises to 5.25 per cent. 
“But many borrowers are paying more than required, they already have significant equity, and they have flexibility to adjust payments in the event of future challenges,” said Dunning. “The very high percentage of Canadians who have never missed a payment confirms that Canadians take their mortgage obligations seriously.”
The survey reported the average outstanding mortgage principal is $138,000 and for mortgage borrowers, the average amount of equity represents 53 per cent of the average value of homes ($297,000). Approximately 11 per cent of mortgage borrowers withdrew equity from their home in the past year, totaling $20 billion, a substantial reduction compared to the $34 billion estimate of 2009. The results indicate caution on the part of borrowers, according to CAAMP.
This view is accentuated by the fact that among mortgages transacted during the past year, 65 per cent are fixed rate, 29 per cent are variable or adjustable, and six per cent are combination mortgages. Most terms are long — 70 per cent are five years or longer, nine per cent have short terms of two years or less, and 21 per cent have terms of three or four years. 
Significantly, of the 65 per cent with fixed rates, 12 per cent locked in from a variable rate during the past 12 months and a further 10 per cent had locked in more than a year ago in anticipation of rising interest rates, says the association.
Ninety-three per cent of mortgage holders have never missed a payment and of the seven per cent who have, four per cent did so during the past year. The survey data indicates that recent purchases and extended amortization periods are no more risky than are prior purchases and shorter amortization periods.
Mortgage holders have also been flexing their muscles, negotiating significant discounts on posted interest rates, according to CAAMP. Over 80 per cent of borrowers negotiated a discount of one percentage point or more.  
Last year, the average five-year fixed rate was 4.10 per cent, while the average posted rate was 5.57 per cent. 
For new mortgages taken out in the last year, 50 per cent obtained their mortgage from a Canadian bank, and 30 per cent from a mortgage broker.
“Our spring survey report reveals a remarkably mature borrower,” said Jim Murphy, president and CEO of CAAMP. “We find that Canadians have taken advantage of the low interest rates to increase their regular payments (16 per cent) and make lump sum payments (13 per cent). This planning puts them in a stronger position to weather more expensive borrowing.”
(This article originally appeared in the June REM, and is reprinted with the permission of the publisher.)