Equity In Homes Will Help Canadian Homeowners Weather Recession

From our June 2009 real estate and mortgage newsletter...equity in homes will help Canadian homeowners weather recession.

The vast majority of Canadian homeowners will have no problem weathering the recession and making their mortgage payments, says a reassuring analysis by the country's largest mortgage brokers association. Although the housing market is expected to be weak until the middle of next year, it says there's no indication that the panic selling and huge house price reductions seen in the United States will expand to Canada.

The report "demonstrates that homeowners have solid equity positions and although facing financial uncertainties, most Canadians have the ability to deal with temporary market fluctuations and reductions in personal income," says Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP), which commissioned the report. "With only a very small number at risk of not being able to pay or refinance their mortgages, our overall market is very strong."

About 65 per cent of Canadian homeowners hold at least half the value of their properties, and of those with mortgages, more than 40 per cent of them hold at least half the value. Those with mortgages have an average of $145,000 equity, representing 51.3 per cent of the average value of their homes, says the report. CAAMP estimates that Canadians' equity in their home equals 72.3 per cent of the total value of the country's housing, compared to an estimated 43 per cent in the United States.

The housing meltdown in the U.S. was largely blamed on increased interest rates, which boosted monthly payments to the point that homeowners could no longer afford them. The CAAMP report says that about three-quarters of Canadian mortgage holders are likely to see a reduction in their interest rates the next time they have to renew, and most of those with increases will be able to handle the increased cost.

Canada Mortgage and Housing Corp. said in a forecast last week that mortgage interest rates will remain relatively stable throughout the rest of the year, with the one-year posted rate in the 4.75 to six per cent range, while three- and five-year rates will be in the five to 6.75 per cent range.

The CAAMP report says the average rate currently being paid is 4.83 per cent. It predicts that among mortgages that are scheduled for renewal during the coming year, rates will fall for 73 per cent, rise for 18 per cent, and be unchanged for nine per cent.

CAAMP also says that its survey "sheds light on the extent of mortgage rate discounting in Canada. Borrowers who have taken five-year, fixed-rate mortgages during the past year have an average mortgage interest rate of 4.91 per cent. Typical advertised rates averaged 6.59 per cent over the same period – these borrowers have negotiated discounts that average 1.68 percentage points below typical advertised rates."

Taking a look at the 18 per cent of homeowners who may see rate increases when they renew, CAAMP says the average cost increase will be $130 per month.

Job loss is the greatest risk facing the Canadian mortgage market, says CAAMP. "However, among mortgage-holding households that have experienced job losses, most have substantial amounts of home equity, which they could use to assist during short periods of reduced income. In a worst case, they could sell their homes to generate funds."

However, another encouraging sign is that new listings in the country's resale markets have been dropping. "This data suggests that despite the slowing economy and softening housing activity, there is not panic selling in Canada, unlike the U.S."

Eight per cent of mortgage holders in its survey indicated that being able to make their mortgage payment is currently an issue or a concern. Although some may get some interest rate relief, the economic climate and increasing job losses may lead to an increase in mortgage defaults, the association says. The current rate of mortgage arrears in Canada stands at about one-third of one per cent, according to the Canadian Bankers Association.

CAAMP says there is willingness on the part of mortgage lenders and mortgage insurers to work with borrowers who are facing temporary income reductions.

Some other mortgage trends noted in the report:

The share of variable and adjustable rate mortgages has jumped from 24 per cent a year ago to 36 per cent. "Variable rate mortgages continue to provide the lowest interest rate," says CAAMP's report. "Selection of a variable rate mortgage does leave the borrower exposed to the risk that the payment could increase, but very few consumers believe that interest rates will increase by very much."

A growing group of mortgage holders (17 per cent) have amortization periods of more than 25 years. Longer amortization periods are fairly new in Canada, and recently the government eliminated mortgage guarantees for amortization periods longer than 35 years.

Mortgage brokers were used by 48 per cent of those taking out first mortgage (compared to 44 per cent who used a bank representative). But when it came time to renew, 61 per cent went to a major bank.


Written by Jim Adair