CAAMP-Spring-Mortgage-ReportSixty-one per cent of Canadians expect rates to increase in the next 12 months, according to a Canadian Association of Accredited Mortgage Professionals (CAAMP) poll.

That begs the natural question: How prepared are borrowers for higher rates?

“Increased mortgage interest rates…will bring stresses for Canadian mortgage borrowers, but a very substantial majority of them are prepared.” That’s the key finding of CAAMP’s Chief Economist, Will Dunning, in this spring mortgage report.

Dunning cites multiple factors that could mitigate the risk of rising rates, including:

  • Income growth
  • Accelerated payments (Many borrowers make extra principal payments and can reduce those payments if needed.)
  • Fixed rates (Most people have their rates locked in, providing at least some degree of protection.)
  • Manageable debt ratios (The average mortgagor’s TDS ratio was just 29% in 2010…vs. the 40-42% maximum guideline.)
  • Equity (79% of home owners have 25% or more equity. Equity grows throughout one’s term and serves as a fallback in case of emergencies.)

CAAMP finds that only 25,000 households (out of 9,450,000) have less than 10% equity and are not able to afford mortgage rates over 5.00%.

Here are other key stats from the report (our comments in italics):

Macro Mortgage Stats

  • Size of residential mortgage market (2011 projection): $1.11 trillion
  • Year-over-year growth in residential mortgage credit (as of April 2011): 7.1%
    [Down from 13% in 2008]
  • Average mortgage: $150,000
  • The amount that equity take-outs have contributed to new mortgage debt in the past year: $16 billion
  • Number of households who are mortgage-free: 3.75 million
  • Ratio of home buyers who don’t require a mortgage: 20%
  • Mortgage renewals in last 16 months: 1.2 million [~75,000 a month on average]
  • Number of people who paid off mortgages during 2010: 200,000 (~3.5% of mortgage holders)
  • Average mortgage size for resale homes: 30% lower than for new homes

Real Estate Market

  • Value of Canadian owner-occupied housing: $3.17 trillion
  • Number of residential dwellings: 13.5 million
  • Number of households who own their home: 9.45 million
  • Number of households who rent: 4.0 million
  • Number of households with mortgages: 5.7 million
  • Average economist forecast for home resales in 2011: 441,000 units [“Job creation is the key driver of housing demand.” — CAAMP]
  • Resale home sales in 2010: 447,000 units
  • Housing starts in 2010: 190,000 units
  • Percentage of Canadians who buy homes each year: 4.5%-5.5% [It’s almost counterintuitive that such a small percentage of the market drives home prices for the rest of the population.]

Equity

  • Average down payment for a home purchased in the last 12 months: 30% (up from 26% for homes purchased two years ago)
  • Home owner equity:
    • Negative equity: 3%
    • 0-9.9% equity: 6%
    • 10-24.9% equity: 12%
    • 25%+ equity: 79%
  • Average equity (for those with mortgages but no HELOC): 49%
  • Average equity (for those with mortgages and HELOCs): 43%
  • Percentage who took out equity from their homes last year: 15%
  • Average equity take-out: $30,000
  • Most common uses of equity take-outs (in this order): renovations, investments, debt repayment/consolidation, education & other
  • Ratio of mortgagors “very uncomfortable” with their equity position: 4%
  • Ratio of mortgagors who are “comfortable” (at least somewhat) with their equity position: 77%
  • People’s chosen equity take-out methods:
    • New first mortgage: 12%
    • Refinance of existing first mortgage: 36%
    • Second mortgage: 13%
    • HELOC: 36%

Rate Choices

  • Rate type chosen:
    • Fixed: 63% (3.6 million home owners)
    • Variable: 30% (1.7 million home owners)
    • Hybrid: 6% (350,000 home owners)
  • Percentage of fixed-rate mortgagors who locked in over the past 12 months: 15% (500,000)
  • Percentage of fixed-rate mortgagors who locked in prior to the past 12 months: 12% (400,000)
  • Average discount off 5-year posted rates: 144 basis points

Amortization

  • Percentage of home buyers (2010 to date) taking amortizations over 25 years: 41%
  • Total proportion of borrowers with amortizations over 25 years: 22%
  • Average amount of time it takes people to pay off a mortgage: 2/3 of the original amortization period
  • Average amount of time people expect it will take to pay off their mortgage: 19.8 years

Accelerated and Lump-sum Prepayments

  • Percentage of mortgagors paying $100+ more than they have to each month (via lump-sums, accelerated payments, and/or payment increases): 60%
  • Average amount of extra principal that people are paying per year via accelerated and increased payments (not including lump-sum prepayments): $5,000
  • Percentage of home buyers who have increased their regular payments at least once: 38%
  • Ratio of mortgage holders who have never made lump-sum prepayments: 65% [Large prepayment privileges are an over-rated mortgage feature if you don’t use them. The problem is, many don’t think they’ll need them, then forgo them, then end up wishing they had them.]
  • Ratio of borrowers making lump-sum prepayments in the past year: 18%
  • Percentage of borrowers who have increased payments and made a lump-sum prepayment in the last 12 months: 9%
  • Percentage of borrowers who have never increased payments or made a lump-sum prepayment: 50%

Market Share

  • Source of new mortgages:
    • Banks: 49%
    • Brokers: 27%
      [Overall broker share now stands at 23%, down over the last few years. This is largely a product of brutal pricing competition from banks’ retail sales forces. Brokers add tremendous value in their advice, experience and comparison shopping, but the environment won’t get any easier for them.]
    • Other: 24%
  • Type of mortgage professional consulted by prospective mortgagors:
    • Banker: 69% (49% actually got their mortgage via the bank)
    • Broker: 55% (27% actually got their mortgage via a broker)
    • Credit Union Rep: 38% (14% actually got their mortgage via a credit union)

Debt Ratios

  • Average GDS ratio in 2010: 19.6%
    [32% is a general maximum guideline.]
  • Average TDS ratio in 2010: 28.9%
    [40-42% is a general maximum guideline.]
  • Percentage of insured borrowers who would have TDS ratios over 45% if rates rose to five percent: 1% or less
  • Number of insured home buyers in 2010 with TDS ratios of 45%+: 2,000-2,500 (out of 9.45 million home owners)
  • Percentage of mortgagors who say they would not be “concerned” about their ability to handle a $300+ monthly payment increase: 66%
  • Percentage of mortgagors who say they have no ability to handle increased monthly payments at all: 3-4%

Miscellaneous

  • Percentage of people who have utilized their skip-a-payment privileges: 11%
  • People who have missed a mortgage payment they weren’t allowed to miss: 5% (Missed payments have become slightly more common in recent years according to CAAMP data.)

CAAMP’s survey was conducted by Maritz during April 2011. It was an online survey of 2,000 Canadians, including 800 mortgage holders.


Rob McLister, CMT