Low interest rates are having a positive impact on how quickly Canadians are paying down their mortgages, finds a report from Mortgage Professionals Canada (formerly CAAMP).
Its Annual State of the Residential Mortgage Market in Canada report reviews and assesses trends in the housing and mortgage markets. The report notes that as interest rates have fallen, the share of payment going towards principal has jumped sharply.
“At today’s rates, and assuming a 25-year amortization period, 50% of the first payment is principal repayment,” notes Mortgage Professionals Canada chief economist Will Dunning. “A decade ago the share would have been 31%.”
The future of mortgage rates in Canada
Dunning expects rates on fixed-rate mortgages will soon start to rise in Canada (less so for variable-rate mortgages), but points to some key factors that will curb the negative impact this may have on Canadians, especially for those who are renewing their mortgages and may be subject to newly added monthly costs because of higher interest rates. Based on evolving economic conditions, a mortgage interest rate of 3.5% was used for the report’s projections. If rates do rise to that amount:
- Almost one million people are expected to be renewing their mortgages in the next two years (based on home purchases between 2011 and 2015 that are coming up for renewal)
- Of those renewing, 290,000 would see their interest costs increase $50, remain unchanged, or even drop
- 200,000 will have increases between $51 and $100
- Approximately 400,000 will see an increase cost of more than $100 per month.
Dunning suggests that general criticism, commentary and other studies addressing the risks related to mortgage renewals do not consider some key mitigating factors, and likely overstate the risks. Mainly, he predicts that many people have wiggle room, and can handle increased monthly costs. This includes those who have made extra payments during their term (approximately 300,000 people) and can now reduce their monthly payments anyway, and those who borrowed less than they were qualified for in the first place so their budgets will already allow for an increase. He also suggests most will have experienced some income growth since they purchased their home.
It’s difficult to speculate how individual homeowners will be able to handle changes to mortgage payments. Ratehub.ca suggests comparing discount rates and posted rates from both mortgage brokers, and banks. You can find the best mortgage rates on our site.
In 2015, 45% of mortgages for recent homebuyers were obtained from banks and 42% from mortgage brokers (the remaining 13% came from other sources like credit unions). The average actual rate for five-year fixed-rate mortgages is 2.81%, much lower than the typical posted rate of 4.68%. That’s why it’s important to shop around for your rates and compare, whether you’re a first-time home-buyer, renewing or refinancing your mortgage, or deciding whether to go through your bank versus a broker for your mortgage.
The current and future state of down payments
Even though home prices have continued to rise, lower mortgage rates have helped home buying remain affordable. However, the cost implications are seen in the buyers’ ability to secure their down payments. According to the report, a 20% down payment on an average priced house is now equal to 93 weeks at the average wage in Canada, compared to 68 weeks 10 years ago, and 53 weeks two decades ago.
A high number of young would-be first-time home buyers say they want to save more for a down payment. Of the youngest groups surveyed, when asked for reasons they don’t own home, 46% said they needed more time to save for a down payment, and on average first-time buyers make down payments equal to 21% of the price of their homes. To fund these down payments, almost half of first-time home buyers use their own personal savings (26% with loans from financial institutions, 15% with funds from parents and family, 8% withdraw from their RRSPs, and 3% from other sources).
If you use a mortgage affordability calculator, you can determine what you can realistically purchase in the housing market, incorporating factors such as your down payment amount, your mortgage rate, amortization period, taxes, and even your monthly expenses.
Residential property prices in Canada have really spiked in the last decade, and particularly in Toronto and Vancouver (up to a 99% increase!). However, optimism is king, according to Mortgage Professionals Canada, touting “the resilience of Canadians as they continue to navigate the residential mortgage market” and continue to invest in homeownership.
You can find the full report here.
Flickr: Jeff Djevdet