Photo: James Bombales
When it comes to taking on mortgage debt, Canadians aren’t worried — in fact, they consider it to be “good debt.” But what exactly does that mean?
“Many Canadians think of a mortgage as a forced saving program,” Mortgage Professionals Canada CEO Paul Taylor tells BuzzBuzzNews. “Any money you’re putting towards your mortgage is money that is going towards an asset that you own, as opposed to something like rent.”
According to the MPC’s Annual State of the Residential Mortgage Market report, released today, 69 per cent of Canadians surveyed would classify mortgages as “good debt.” Another 71 per cent considered real estate to be a good long term investment.
The report also found that Canadians are motivated to repay their mortgages, with one-third taking actions within the last year to shorten their amortization periods. Mortgage arrears have fallen to 0.24 per cent in 2017.
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Still, the report does highlight some areas of concern, including the new mortgage rules announced earlier this fall.
Starting January 1, a new stress test will require all uninsured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate plus an additional 2 per cent.
The test is intended to ensure that uninsured borrowers can withstand higher interest rates. The overnight rate — which influences mortgage rates and sat at a historically low 0.5 per cent earlier this year — has been raised 50 basis points since July, with further hikes predicted in 2018.
The report also found that ownership rates for first-time buyers fell by 4 per cent in 2017, and that an additional 6 to 7.5 per cent of all potential buyers, insured and uninsured, will be unable to purchase a home as a result of the stress test in 2018.
“With the recent further tightening of mortgage rules, ownership challenges have been intensified and the ownership rate is very likely to fall further,” MPC chief economist Will Dunning writes in the report.
Taylor agrees, saying that the new stress test, in addition to rising interest rates, will place increased pressure on many would-be buyers. However, he also says that Canadians are resourceful when it comes to managing higher debt loads.
“The thing about the Bank of Canada continuing to raise interest rates, is that it means our economy is doing well, and that Canadians are making money,” says Taylor. “There is an overstated fear that if the rates are raised Canadians won’t change their behaviour. As soon as rates start to raise, people call and lock in.”
Still, Canadians have some of the highest debt levels in the world. According to a recent report from the Organization of Economic Cooperation and Development, Canada’s household debt-to-GDP ratio now sits at 101 per cent, well above the United States’ 80 per cent and Germany’s 60 per cent.
A recent report from Toronto-based credit ratings agency DBRS cautioned that Canadian mortgage holders might not be ready for higher interest rates.
“Over the last three decades, Canadian households have not had to adjust their spending to cope with higher mortgage rates,” reads the report. “Recent buyers in markets where house prices have been increasing rapidly may face greater risk, as their sensitivity to mortgage payment shock is highest.”
MPC forecasts that housing activity in Canada may fall by 12 to 15 per cent in 2018 due to the new stress test. Already, mortgage credit growth has fallen from 7.3 to 5.9 per cent in 2017.
“I do think these new regulations will have a negative impact on the Canadian housing market, and that young Canadians and middle class Canadians will be hit the hardest,” says Taylor.