Homeowners are reducing their principal by $11 billion a year more than
official estimates indicate
TORONTO, Oct. 15, 2014 /CNW/ - Canadians are paying down their mortgages
at a record rate, significantly lowering the risk of default should
interest rates rise, finds a new report from CIBC World Markets.
"Canadian households did not only resist the temptation of low rates,
they used those low rates to pay down debt at a pace not seen before,"
says Benjamin Tal, Deputy Chief Economist, CIBC. "Despite a lethargic
labour market and an unemployment rate that is still too high for the
Bank of Canada's liking, debt service performance in Canada has almost
never been better."
Homeowners are taking advantage of prolonged low interest rates to pay
off their mortgages by accelerating their principal payments. In
effect, they are voluntarily shortening their amortization periods. As
a result, Mr. Tal estimates the average amortization period in the
Canadian mortgage market is now closer to 20 years rather than the
implicit assumption of 25 years the Bank of Canada uses in its
Indeed, instead of spending their disposable income, Canadians are
making sacrifices, choosing to make extra payments on their mortgage to
get out of debt faster. This ultimately makes Canada's mortgage market
more stable because in the event of a rate hike, homeowners would
simply return to their regular amortization period, he says.
"Canadian households are paying back an additional $11 billion a year in
principal that's not being officially recognized," says Mr. Tal. "That
extra cushion is sufficient to absorb the first 100 basis point
increase in the effective mortgage rate, with households simply
re-amortizing to offset the payment increase."
The report finds that the debt-service ratio in the Canadian mortgage
market - the cost of carrying a mortgage as a share of disposable
income - at the aggregate level is 7.3 per cent, a full percentage
point higher than the current 6.3 per cent officially stated by the
Bank of Canada.
Even in high ratio mortgages, the risk of default appears slim, says Mr.
Tal. High ratio mortgages based on their loan-to-value (LTV) position
reveals that very little has changed over the past few years, with the
share of mortgages with LTV larger than 80 per cent in fact falling by
five percentage points since 2009, he says. As well, the percentage of
households allocating more than 40 per cent of their income to debt
financing has remained relatively unchanged at just over 6 per cent
since the 2008.
The report notes that the strongest predicator of mortgage default in
Canada over the past six years has been a person's credit score. Here
again, the picture is encouraging, says Mr. Tal.
The average credit score in Canada has trended upward over the past five
years, with improvement seen in all regions and age groups, he says.
Further, sub-prime credit - defined as those with a credit score of
less than 620 - has remained virtually unchanged at close to 10 per
cent of new accounts in recent years and is only 3.5 per cent of total
new mortgages, he says.
"Canadian households deserve credit for not taking credit," he says.
"But, it's not over yet. The Bank of Canada is determined to keep rates
low for as long as possible - further testing the willpower of
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eioct14.pdf
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SOURCE: CIBC World Markets
For further information:
Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. at (416) 956-3698, email@example.com or Kevin Dove, Head of External Communications at (416) 980-8835, firstname.lastname@example.org.