Many Canadians are still borrowing money to make a down payment on their home, but the good news is that most Canadian homeowners are taking steps to whittle down their mortgage debt.
A pair of recent studies shows that paying down mortgage debt is a priority for many canucks.
A survey by the Canadian Association of Accredited Mortgage Professionals shows Canadians have tended to pay relatively high down payments on their homes with first-time buyers paying an average of 21 per cent toward their homes, and for those who have bought and sold several homes the average is 48 per cent.
“We still see numbers that [show] up to a third [of home buyers] are making extra payments on their mortgage,” says Jim Murphy, president and CEO of CAAMP. “They’re making increased frequencies, you know, weekly instead of monthly. Arrears rates are fairly low, so there’s still a lot of good things happening in the overall mortgage market.”
Another recent survey from Manulife Bank of Canada says almost half of Canadian homeowners are taking steps to whittle down their mortgages: 18 per cent of homeowners made extra lump-sum payments toward their mortgages in the last year, 17 per cent increased their regular payments and 5 per cent did both.
This comes as good news to Richard Silver, Senior Vice President at Sotheby’s Canada.
“I’m one of those people who’s very conservative in my approach. So even though I’ve had mortgages, and at times I was leveraged fairly high, my goal was always to pay down the mortgage as soon as you can,” says Silver. “So I think it’s important to make sure if your monthly payment is 300 [dollars], make sure you can double it to 600 so you can pay off the mortgage as soon as possible. A mortgage, like all loans, is very heavily interested-weighed so the sooner you can pay it off the less it will actually cost you. If you look at an amortization table of any loan and you look at how it’s amortized, especially over a 25-year period, if you can cut down the amortization period or double up the payments and stuff you can save a lot of money. Huge amounts over the term of the loan.”
The CAAMP survey also found that Canadians are borrowing more than $10 billion a year from family, lenders and credit cards to make their down payments.
“Eighteen per cent get it from the bank of mom and dad, so they get a gift or a loan from a parent or a relative. They receive 10 per cent of their down payment from the RRSP homebuyers plan, and 5 per cent of first-time buyers access their TFSA,” says Murphy. “So roughly a third of all first-time buyers in Canada had help in terms of their down payment from those sources in order to get into the housing market.”
So, is it a good idea to be hitting up the ‘bank of mom and dad’ when you’re buying a home?
“I know that that’s what my parents did,” says Silver. “They borrowed money from my grandmother to put a down payment on their first house. I think that’s generational, I don’t think it’s really much changed from any other time. I think what is changed now is that the older generation do have more money. The people who have now become empty nesters, they are more solvent and they have a better resource to give their kids more money. So I think that’s what we’re seeing more of. It’s not necessarily that the kids need it or couldn’t manage without it, it’s just that it’s there and they would like to have it, that’s all.”
But we do face an uncertain future for the mortgage market. The Bank of Canada has been keeping its key benchmark rate low, spurred to do so by a slide in the price of oil. Crude has fallen more than anyone expected in the past year and that has forced the government to change its economic projections.
As such, homeowners have been helped by record-low mortgage interest rates. The average is 2.68 per cent this year, down from 3.08 per cent in 2013. But it’s unclear how long those will last.
So interest rates are low, and that means it’s a good time to buy, but as Manulife found, any increase in rates could push many buyers out of the market. More than a third of respondents said they would face financial hardship if their mortgage payments increased by just 10 per cent, while another 15 per cent said they couldn’t handle any increase at all in their mortgage payments. With rates at historic lows, it’s inevitable that they’ll eventually rise. Richard Silver just hopes it isn’t a drastic increase.
“I think when rates are low there has a tendency to be a lot of activity. If they increase it too much it absolutely cuts down business completely, both real estate and otherwise. People won’t get into new ventures. And you never know, some people might be borrowing against their house to actually start a new company. I think the market seems to be better when the rates are lower. The scary thing though is the rates start moving up then people panic buy, and that’s one of the things you want to be careful with.“
Silver says even the scent of a coming rate hike could prompt people to enter the market who just aren’t ready.
“Now’s a good time to buy, so they may end up in a situation where they’ve really overpaid or bought something that they’re not that interested in just to buy something,” he says. “That fear of losing a good rate may push them into something they shouldn’t be in.”
Jim Murphy is also weary of a rate hike.
“That means that there wouldn’t be as many resales, that would probably also affect not only activity but probably prices and have a negative effect on the overall housing market,” says Murphy.
Wherever you are in the housing market, if you’re just starting out or if you’re a seasoned veteran of open houses and an escrow expert, it’s important to remember to get your mortgage paid down as quickly as possible. That’s something that more and more Canadians seem to be doing.
“If you’re going to borrow money it’s a great time to do so, but make sure that you pay it off as soon as you can because otherwise the costs to pay it off are quite high at the end of the day,” suggests Silver.
Title photo by: GotCredit