Monday Mortgage Update: October 22, 2012

Alyssa Furtado
by Alyssa Furtado October 22, 2012 / 11 Comments

Canadian Household Debt Reaches U.S. Bubble Territory

The average Canadian household is even more in debt than we could have imagined. According to Statistics Canada, the debt-to-income ratio (calculated by dividing your total debt by your annual net income) has ballooned to 163.4 per cent in the second quarter of 2012. This means for every dollar of debt, Canadians only have 63 cents of income to show. At first, I was surprised to see that the new calculation resulted in such a high number (up from 152.0 per cent in the first quarter), but the new debt numbers aren’t as scary as they would seem.

The revised ratio provides a more accurate financial picture, by excluding non-profit organizations. As a result, Canadians can now finally make an apples-to-apples debt comparison with Americans. With more equity in our homes and far fewer sub-prime mortgages, we are still much better off than Americans. However, if you’re a first-time homebuyer with little equity in your home, it’s important to understand the risks you could face if a 15 per cent housing correction occurred. Your home equity could be completely wiped out, resulting in a mortgage worth more than the fair market value of your house. This is a situation nobody wants to find themselves in.

Canadian Housing Continues to Slow, Prices Only Slightly Up

The Canadian real estate market continues to show signs of slowing. Despite some of the best mortgage rates in Canada being available, the Canadian Real Estate Association reported existing home sales were down a whopping 15.1 per cent nationally in September. If you live in one of Canada’s largest cities, you fared even worse: sales in Vancouver were down 32 per cent, while Toronto sales were down 25 per cent.

Up a paltry 1.1 per cent, prices didn’t fair too well either. Major cities that saw the largest gains include: Regina (14.2 per cent), Calgary (6.5 per cent), Toronto (5.7 per cent) and Greater Montreal (2.2 per cent). Vancouver continued its trend into a buyer’s market, as average prices went down by 3.8 per cent. If you’re looking to buy a home in Vancouver, these figures are promising, as you’ll actually be able to negotiate with sellers, get a proper home inspection, and not have to deal with the “dreaded” multiple offer situation.

Canada Mortgage Rates: Where are they this week?

A history of weekly 5-year fixed mortgage rates and 5-year variable mortgage rates

Canadian Mortgage Rates in 2012

The average discounted mortgage rate in Canada for 2012:

Note:  This is simply a small sample size and does not represent the entire market. It does, however, offer some useful insight.

 Sean Cooper is a personal finance freelance writer and blogger. You can check out his portfolio at

  • This article has entirely accurate information and entirely inaccurate conclusions (drawn or eluded to).

    #1. Debt-income ratio is a cash flow ratio that is largely over-used and over valued. It’s best usage is for lenders to hypothesize how “financially strapped” a potential borrower is. Unfortunately, it is largely useless for the average joe.

    #2. What’s even worse is you’ve gone ahead and used a headline that is designed to create mass hysteria. You should be ashamed. Just because ratios may be close (and in fact most developed countries have similar ratios) doesn’t mean the same thing will happen here.

    #3. A “Sub-Prime” mortgage here in Canada would be a variable rate that is less than prime. THERE IS NOTHING WRONG WITH THIS. Banks borrow at prime, then, thanks to fractional banking, loan 10 times that amount to people. So let’s say the bank borrows 1 million at 3%, then they loan 10 million to people SUB PRIME at 2.5% – well, the banks actual gross profit becomes 2.5% x 10 (fractional banking-3% = 22% gross profit. No one is sinking on that, so again…quit fear mongering!

    Also, sub-prime mortgages in the states were characterized by ballooning interest payments and the “sub-prime” portion was normally a teaser rate that doubled or tripled in the subsequent years making payments unaffordable. Again…this is not happening here.

    To sum up – great numbers. Poor analysis.

    P.S. Nothing is on it’s way up forever – Not world super powers, not Apple and not Real Estate. You’re right, it sucks when you’re in a negative equity situation, but it’s not the end of the world….and price corrections are a healthy and natural part of the cycle. Failing to be aware of those possibilities is every individual investor’s responsibility.

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  • Sean Cooper

    @Dale Thank you for the comment and feedback. Very good points!
    1. I agree the debt-to-income ratio isn’t always the best financial measure, but like all ratios it only measure one specific thing. You have use other ratios like the TDS and GDS ratios to get the complete financial picture. As an example, a business may seem healthy if you use one financial ratio, but you may find out it’s cash-strapped if you use another.
    2. The media likes to use this figure, which is why I included it and explained how to calculate it. Although a person’s TDS and GDS ratios may be healthy, if you were to ever lose your job and you have a debt-to-income ratio of 300%, you may find yourself in financial difficulty.
    3. Perhaps I could have been more specific with what I meant when I said sub-prime market. When the media refers to the sub-prime market in the U.S. it seems they are usually referring to the teaser rate mortgages you mentioned. I wasn’t referring to the variable rate mortgages you mentioned.
    P.S. If your mortgage is underwater you may have difficulty when you renew your mortgage. I just wanted to ensure the average homebuyer was aware of that if a 15% housing correction does indeed occur. Thanks again for the thorough comments and points!

  • Great discussion @Dale and @Sean.

    @Dale Sup-prime lending in the US does not mean lending at a rate below prime. It instead refers loans given to those with low credit scores. Individuals who traditionally were unable to acquire loans.

    Have a read here for additional information:

    Some people have equated Canadian’s shorter term mortgage rates with the “teaser rates” seen in the USA. I.e. Canadians may be able to afford their mortgages at today’s low rates, but if rates increase in 5 years when their 5-year rate is up for renewal, that borrower could be in trouble. Especially since in the first 5 years, little principal repayment would have occurred.

  • I believe Alyssa already commented on what Prime vs Sub-prime lending is, so I’d like to touch on “teaser rates”. Teasers were quite popular in Canada about 5 years ago especially in the variable-rate market. I recall CIBC Firstline offering prime-1.1% for the first six months, then prime-.40 for the remainder 4.5 year term. This was / is / always will be a HORRIBLE rip-off to the borrower vs taking a 5-year prime-.75 (which was then available). However, in the U.S., teasers were quite different in that there wasn’t the .35 spread but rather more closer to 2-5% spread upon rate reset. THAT was a huge contributing factor to the crash, something we haven’t seen here and won’t see here because teasers have exited the building thankfully.

    The “sub-prime” market in Canada will only grow, hence the relative financial growth of Home Trust, Equitable Trust, and the like. These two companies are growing quite well in their space because they see a big opportunity to lend to “sub-prime” clients; as described those with credit issues OR income provability issues. Sub-prime lending doesn’t only go to people with bad credit, it also goes to people who find it difficult to prove income to CMHC or to traditional lenders, but who do make the income necessary to qualify for loans. A client of mine with 720 credit score turned to a sub-prime “B” lender (as we call them) because he is a waiter earning a very low minimum wage, had saved up 25% through 5 years of hard work, and who can maintain the mortgage payments at only .75% higher than a traditional lender who could not quantify his “real” income.

    Hope I have added some points of reference to the discussion!

  • The information provided is clear and direct enough for a client to understand. It’s important to advise making one’s own conclusions from the numbers.
    Good points both @Alyssa and @ Dale.

  • @Sean -Great comments. I’ll simply say this: Would you trust a stock broker to change the transmission in your car? No necessarily. The media’s job is to deliver the news not to be a financial expert. They get people to read their news (instead of the “other” guys) by being sensational. I think that should encourage some skepticism when mimicking them.

    @Alyssa – thanks for the correction. I knew they were targeted – I didn’t know they named the actual product after them! I actually saw that as I was writing and thought it was inaccurate – moral of the story is wikipedia is always right.

    @ Premier mortgages. It’s hard for people to make proper decisions when #1 – they are extremely emotionally charged/attached to the situation and #2 – brokers utilize their position of authority and trust to secure the deal and (especially with younger home buyers). So the question is – what can we do to improve the situation?

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  • What about mortgage insurance? Bank or broker owned or personal which is better?

  • Sean Cooper

    I would avoid mortgage insurance all together. It’s declining-benefit insurance, so your benefit decreases as you pay off your mortgage principal. Plus, it’s underwritten after you pass away, so if you filled out your medical questionnaire incorrectly your claim could be denied. I would go with term life insurance – it’s perfect for covering non-permanent debts like mortgages.