Canadian Association of Accredited Mortgage Professionals releases
Annual State of the Residential Mortgage Market in Canada report

Canadian homeowners are comfortable with their mortgage debt, have significant home equity and could withstand an increase in their mortgage interest rate, according to the sixth Annual State of the Residential Mortgage Market report from the Canadian Association of Accredited Mortgage Professionals (CAAMP), released today.

Highlights:

• The vast majority of Canadians with mortgages are able to afford at least a $300 increase in their monthly mortgage payments.
• One in three (35 per cent) mortgage holders have either increased their payments or made a lump sum payment on their mortgage in the last year.
• 89 per cent of Canadian homeowners have at least 10 per cent equity in their homes and 80 per cent have more than 20 per cent equity.
• Overall home equity is at 72 per cent of the total value of housing in Canada; for homeowners who have mortgages, equity level averages 50 per cent.
• As of August 2010, there was $1.01 trillion in outstanding residential mortgage credit in Canada, an increase of 7.6 per cent from last year.

“Canadians are being smart and responsible with their mortgages,” said Jim Murphy, AMP, President and CEO of CAAMP. “They are building equity in their homes and making informed, long-term mortgage decisions. The survey results speak to the strength of our mortgage market, especially when compared to the United States.”

Homeownership is a good long-term investment
Most Canadians agree that buying a home is a good long-term investment and are focused on their mortgages to support that investment.

Many mortgage holders are making voluntary additional payments: 16 per cent have increased monthly payments during the past year, 12 per cent have made lump sum payments, and 7 per cent did both.

Canadians are exercising caution when taking out their mortgages, with a majority choosing a fixed-rate (66 per cent). A five-year fixed-rate mortgage remains the most popular option in Canada. Despite the fact that variable rate mortgages have become much less expensive compared to fixed rates, the majority choice is still fixed rates: this decision is based on people’s individual assessments of risk, not just the cost difference.

Potential rate increases won’t be a problem
The CAAMP study found that a vast majority of Canadians have significant capabilities to afford higher payments if and when mortgage interest rates rise. 84 per cent report that they could weather an increase of $300 or more on their monthly payments.

Most of the people who have low tolerances for increased payments have fixed rate mortgages, by the time their mortgages are due for renewal, their financial capacity will have expanded and their mortgage principal will have been reduced.

Also, Canadians have been able to negotiate better than posted mortgage interest rates. For five year fixed rate mortgages arranged in the past year, the average rate is 4.23%, which is 1.42 points lower than typical, advertised rates.

Of the 1.4 million Canadians who renewed their mortgage in the past year, 72 per cent were able to renegotiate a decreased rate: on average, rates are 1.09 percentage points less than the rates prior to renegotiating.

Canadians have significant equity in their homes, strengthening the housing market
Canadians’ home equity is impressively high. Among homeowners who have mortgages, the average amount of equity is about $146,000, or 50 per cent of the average value of their homes.

The amount of equity take-out in the past year is unchanged from last year with around one in five homeowners, or 18 per cent, taking equity out of their home, at an average of $46,000. The most common purpose for equity take-out is debt consolidation and repayment (45 per cent) followed by home renovations (43 per cent), purchases and education (19 per cent) and then investments (16 per cent).

The report is authored by CAAMP Chief Economist Will Dunning and based on information gathered by Maritz Research Canada in a survey of Canadian consumers conducted in October 2010.

The CAAMP survey report contains a wealth of industry information, including consumer choices and borrowing behavior, opinions on current “hot topics” related to housing and mortgages, regional breakdowns of responses, and an outlook on residential mortgage lending.

For a copy of the report, please visit www.caamp.org, ‘Mortgage Industry’, under ‘Resources’.

Recently a close friend showed me how she was going to consolidate their high-interest debt into their mortgage to reduce their overall interest rate and free up hundreds of dollars in cash flow every month. Debt consolidations are nothing new, but they only work if the person is not simply looking for a quick fix.

In this particular case, $410 was freed up in monthly cash flow and the refinanced mortgage interest rate was lower. In many situations, however, consolidating debt into a mortgage comes at a cost: You must break your current mortgage and the high-interest debt then gets amortized into the new mortgage balance at a lower interest rate. Your overall debt goes up by a few thousand dollars (the cost to break the term and perhaps paying a CMHC premium on the increased balance on the mortgage), the rate of interest you pay overall goes down, but those high-interest debts are now being paid off over much longer periods of time.

So what’s better? Paying high interest for a few years or paying lower interest for a few decades? Well, you have to do the math, and then you have to figure out if you are just giving yourself more rope with which to hang yourself.

Before

$245,000 mortgage @ 5.25% amortized over 20 years, monthly payments of $1,650

$15,000 other debt @ 18.99% which would be paid off within 3.5 years with $500 monthly payments

Total Monthly Payments: $2,150

Total Principal Paid: $260,000

Total Interest Paid: $155,000

Total Principal and Interest: $415,000

After

$270,000 mortgage @ 4.75% amortized over 20 years, monthly payments of $1,740

Total Monthly Payments: $1,740

Total Principal Paid: $270,000*

Total Interest Paid: $145,000

Total Principal and Interest: $415,000

* Extra $10,000 covers fees and penalties to break current mortgage plus new CMHC premiums

Monthly cash flow saved: $410

So in this case, the math works, especially if the monthly cash flow savings of $410 is put to productive use, like contributing to an RRSP or building an emergency reserve. There are many variables at play here: interest rates, amortization, fees and penalties for your specific situation. You may find the overall cost of borrowing to be higher or lower than your current situation. Always run through the math.

But the more important consideration is whether or not you will get back into the habit of spending more than you earn. If that does happen, then what do you do the next time you’ve racked up too much debt? Refinance again? The vicious debt spiral can only be stopped once you master your monthly budget. If you can run a surplus for six months without problems, then by all means take a look at refinancing. But if you can’t run that surplus, don’t kid yourself: The same short-term thinking that caused you to run a deficit will cause you to tighten that noose around your neck.