Canadians appear well prepared to face the new phase of the residential mortgage market, with rising interest rates, according to the sixth bi-annual review of the Canadian mortgage market by the Canadian Association of Accredited Mortgage Professionals (CAAMP).
“Our spring survey report reveals a remarkably mature borrower,” said Jim Murphy, AMP, 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.”
The report, entitled Prudence Paying Off For Canadian Mortgage Borrowers, was written by CAAMP Chief Economist Will Dunning and is based on information gathered by Maritz Research Canada in a survey of Canadian consumers conducted in April this year.
The report found Canadians are positive about the housing market in their communities, but very few said they were likely to buy, suggesting activity may slow during the remainder of this year, according to Dunning. 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 now indicating they expect house values to increase rapidly. Previously, attitudes varied between provinces, but this spring, optimism is nationwide.
The CAAMP survey report revealed the average outstanding principal on a home 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 reduction indicates caution is being exercised by borrowers.
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 five years or longer, nine per cent short terms of two years or less, and 21 per cent with 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.
The vast majority — 93 per cent of mortgage holders — has never missed a payment and of the seven per cent who did, 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 by negotiating significant discounts on posted interest rates. 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, 30 per cent from a mortgage broker.
With the mortgage rate increases up to 5.25 per cent, the report found that about 375,000 mortgage holders are already challenged by their current payments, and another 475,000 might be if their rate rises were to rise 5.25 per cent.
“But,” said Dunning, “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. The very high percentage of Canadians who have never missed a payment confirms that Canadians take their mortgage obligations seriously.”