Sixty-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
Visited 2 times, 1 visit(s) today
Last modified: October 10, 2014
Why are we still looking at those misleading averages. I note the figures show 9% of mortgagors have less than 10% equity. If they get into trouble, the real estate market will be in trouble. Never mind how good the averages are.
Leo Lee
You should know that not all of that 9% will “get into trouble.” I’m surpised you don’t understand that being that you’re supposedly a mortgage broker.
Bruins in ’11
The statistics about amortization were sort of interesting. People who get their panties in a bunch about 35 year amortizations fail to realize that most people will take just 20-25 years to pay them off.
Interesting data.
On one hand:
•Percentage of mortgagors who say they would not be “concerned” about their ability to handle a $300+ monthly payment increase: 66%
But:
•Percentage of borrowers who have never increased payments or made a lump-sum prepayment: 50%
One could infer that while the majority of folks are not concerned with increasing rates, yet, almost just as many do not take advantage of opportunities to pay down their debt faster – they are not concerned either way.
Probably a good indicator of human nature – accept things the way they are.
Cheers,
Mark
“Average amount of extra principal that people are paying per year via accelerated and increased payments (not including lump-sum prepayments): $5,000”
Per year? That’s quite high. If you accelerate a monthly payment you end up making one additional payment per year. Where’s the rest coming from? This means that the consumer has to post an additional $350 to $400 every month in payment increases to reach $5,000 a year. Don’t get me wrong, this is very good news if it’s actually happening, but I think these figures are a bit exaggerated.
Hi Lior,
I found that one somewhat counter-intuitive as well, especially since it doesn’t include lump-sums and since 62% of mortgagors have never increased their payments.
Cheers…
Rob
“Percentage of home buyers (2010 to date) taking amortizations over 25 years: 41%”
Wow. And that’s not just first-time buyers, but all home buyers.
I wonder if related data exists for down-payment size.
Hi Joe,
Thanks for the post. Coincidental that you should ask. We’ll be running a story on down payment size next week! Just got the data yesterday.
Regarding amortizations, many people clearly take longer mortgages so they can qualify for more house.
A lot of others, however, go long-term so they can manage cash flow—allocating freed-up cash to better uses and/or making prepayments to reduce their effective amortization. It would be interesting to know what ratio of long-am borrowers this comprises, but we’ve never seen such figures.
In any case, 6 in 10 still go with standard amortizations or shorter…so that’s somewhat comforting.
Cheers…
Rob
Not sure how you come to that conclusion, but assuming it’s true, it suggests the 35 year amortization was unnecessary and the 30 year is too.
Don’t forget people going long am to maintain or improve their lifestyle.
>WJK
It is common knowledge in the mortgage industry that people pay off mortgages sooner than their amortization. CAAMP’s report backs that up.
30 and 35 year amortizations serve an important purpose because they give people flexibility in setting their monthly obligations. That can be helpful in any number of valid circumstances.
With all respect, your conclusion that longer amortizations are not necessary simply doesn’t make sense.
Hi WJK,
Some would lump lifestyle choices in with “allocating freed-up cash to better uses.” One can debate the term “better uses” but it’s hard to generalize or judge peoples’s personal circumstances.
Cheers…
Rob
Good point WJK, the long amortization also comes in handy for retirees. When incomes are cut and they are left with just pentions. They may only have 5 years left on a mortgage, but if they switch to a long amortization they can remain in their home with a very small mortgage payment. There are many reasons for a long amortization that suite a specific purpose.
I have also noticed a lot of first time home buyers initially take the longer amortization because they need to for qualifying; however, they are at the giginning stages of their careers and know raises are coming.
beginnig
Anyone else in the Mortgage industry find it alarming that out of the 55% of people that consulted a mortgage broker, only 27% end up closing with them.
Is this due to banks and what they offer the clients? Why such a disparity? Any thoughts on how we can increase that closing number?
I think the simple reason is most people have multiple services with their bank so that’s where they go first. Those who tend to shop around more will entertain a few offers and then decide. I hope that people give priority to strategy offered by the institution or brokerage as opposed to just the rate.
Banks have way better customer retention training than brokers. They also have huge brands behind them. Brokers offer way better choice and advice but sales training and powerful brands give banks a big edge.
•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.]
Sounds like bias from CAAMP with the quote “brutal pricing competition” how come when a broker offers the best rate it’s all good, but when the banks offer better rates its “brutal pricing competition”? A worrying concern for brokers should be that
◦Broker: 55% (27% actually got their mortgage via a broker)
So prospective clients spoke to a broker and less than 50% of them actually used a broker. Also the marker share for brokers is falling and “the environment won’t get any easier for them”
If more banks see less value added by using brokers and the trend keeps up with consumers, it’s going to be very difficult to survive for an average broker
Hi Jon,
Thanks for the post. It is our comments that are in italics, not CAAMP’s.
The statement on pricing is factual. Use whatever adjective suits, but the truth is that banks have become far more competitive on rate since 2009.
You make a good point about the 55%/27% “closing ratio.” Obviously a lot of people also consult banks and don’t close with them, and it’s even worse with credit unions (according to CAAMP’s data).
The fact is, many people use brokers as a 2nd opinion and then get their bank to match the rate. Our goal, as an industry, should be to make brokers the 1st opinion, and keep improving the guidance and planning that we provide to consumers.