Canada Prepared For Rising Rates: CAAMP

Claims that Canadians are taking out risky variable-rate mortgages and borrowing more than they can afford “are not based on actual data” and “are misinformed.” That’s according to CAAMP, who issued this study of 40,000 mortgages from 2009:  Revisiting The Canadian Mortgage Market…

Despite rising home prices, first-time mortgagors took out “far less” than they could afford last year, says CAAMP.

"The vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates in to their mortgage decisions," stated Jim Murphy, president and CEO of CAAMP.

CAAMP ran simulations to estimate what would happen if the Bank of Canada hiked rates 3% over two years (and fixed rates rose 1.25%).

It found that income gains should offset much or all of the increases in mortgage payments that most Canadian’s would experience.

"The bottom line from the simulations is that even though mortgage payments will probably rise for most borrowers, the increase in their incomes will more than offset the higher payments," said CAAMP chief economist Will Dunning. “All in all, the degree of risk from rising mortgage rates appears to be small and manageable,” he writes.

A key finding in the report was that 86% of Canadian home buyers took out fixed rates in 2009.  Here’s a breakdown of the terms they selected:

• 5% chose 1- to 2-year terms
• 20% chose 3-year terms
• 5% chose 4-year terms
• 70% chose 5- to 10-year terms

Other notable findings from the study:

• 5%:  Number of Canadian households who purchase a home each year.
• 50-60%:  Number of those who are first-time homebuyers.
• 0.03%:  Percentage of first-time home buyers (compared to all home owners) that are “pushing the envelope” by getting mortgages they may not be able to afford.
  
  CAAMP estimates these “at-risk” borrowers amount to 4,000 households out of 13,250,000 in Canada.
  
• 10%:  Annual growth rate of mortgage debt in the last five years.

”This growth rate was far in excess of growth of incomes and therefore mortgage debt has become a growing burden for Canadian households,” CAAMP said.

CAAMP attributed this growth to rising home prices and increased home ownership. 70% of households now own homes, versus 63.6% in 1996.

• 5.425 million:  Number of Canadian mortgage holders.
• 22.3%:  Average GDS ratio of a home buyer in 2009
  
  32% is the traditional GDS maximum. This stat is a pleasant surprise. According to CAAMP’s findings, most Canadians appear to be underbuying, not overbuying--as some critics charge.
  
• 32.8%:  Average TDS ratio of a home buyer in 2009
  
  Similar to GDS above, this is well below the standard. 40-42% is the typical TDS maximum.
  
• 0.44%:  Current percentage of mortgage holders in arrears.
  
  CAAMP says arrears averaged 0.50% in the 1990s. Mortgage arrears are highly correlated with Canada’s employment rate. Reduced hours/pay and separations/divorce are secondary factors. CAAMP says it “appear(s) most likely that the arrears rate is close to peaking.”

Dunning closed the report by writing: “Virtually every Canadian who is in a position to buy a home and qualify for a mortgage is well-educated and capable of assessing what is in their best interests, of looking forward, and of anticipating threats to their financial well-being.”

Let’s keep it that way by advising homeowners to remain conservative.

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Sidebar:  More details on the study above:

• Data was collected from a CAAMP survey of its corporate members
• Sample size was 40,000 mortgages totalling $10 billion
• This represents about one-sixth of total mortgage activity for home purchases in Canada.
• The mortgages were all funded in 2009
• The data included purchases only. No renewals or refinances.
• The vast majority of mortgages in the dataset are high-ratio and insured.