Manulife released new data this week on homeowners’ tendency to prepay their mortgages, as well as their ability to withstand interest rate hikes. Here’s what those numbers revealed.

Prepayment Trends

Mortgages with big prepayment allowances save a small fraction of the population a lot of interest. There’s no disputing that. But for most, they are one of the more over-rated mortgage features. Manulife’s Homeowner Debt Survey supports that assertion.

The report found that while 40% of mortgage holders paid extra on their mortgage last year, those payments totalled only 3.3% of the average Canadian’s mortgage balance (which is $190,000). Moreover:

• Fewer than 1 in 15 mortgagors pre-paid more than $10,000.
• Only 1 in 50 prepaid more than $25,000 (i.e., more than 13% of the average Canadian mortgage balance).

This chart from Manulife helps explain why 6 in 10 mortgagors are passing up prepayments.

Borrower Stability

It’s encouraging that 56% of homeowners said they reduced their debt in the past year. That’s up from 51% a year ago.

Clearly, the majority of borrowers have household debt under control. But Manulife’s survey revealed some sobering statistics on the minority, like the fact that 40% of homeowners claim they’d struggle to make their mortgage payments within three months of being out of work.

In the event that the primary income-earner lost his/her job:

• One in six homeowners said they’d struggle to make their regular mortgage payment within just one month.
• Over a quarter (27%) would struggle to do so after three months.

And then there are interest rate hikes to consider:

• More than a third of homeowners surveyed would encounter “financial difficulty” if their mortgage payment increased by just 10%.
• 15% of mortgagors said they could not absorb any increase in their payment.

Now, mind you, surveys have a funny way of drawing out biased responses. And this may be one of those cases.

CAAMP economist Will Dunning told Amanda Lang his research suggests that many people have paid more than they’re paying now. Yet those same people say they can’t afford higher payments.

“Probably, they’re not telling us what they can afford,” he said. “They just don’t want to see their payment rise…”

Whatever the case may be, it appears there is still ample room for financial improvement before a sizable minority of homeowners achieve a good night’s sleep.

The Survey: The Manulife Bank of Canada poll surveyed 2,372 Canadian homeowners between ages 20 to 59 with household income of $50,000 or more. The survey was conducted online by Research House between February 10 and 27, 2015. National results were weighted by province, income and age.

Last modified: July 20, 2015