Household mortgage debt hits record

Personal Finance

Household mortgage debt hits record

Families – especially first-time buyers – ‘may not fully realize what an increase in mortgage rates will mean for their monthly payments,’ study says

Tavia Grant

Toronto Globe and Mail Update

More Canadians – especially young, first-time home buyers – are assuming mortgage debt they might not be able to afford once interest rates start to rise, an annual study cautioned Tuesday.

National house prices hit $340,000 in late fall, equal to five times the average after-tax incomes of Canadian households – a far greater portion than the long-term average of 3.7 times, the Vanier Institute of the Family said in its report on the current state of family finances.

Canadian interest rates are set to rise, as early as this summer, and the report warned that many families – especially first-time buyers who took advantage of record low rates to enter the market – “may not fully realize” what an increase in mortgage rates by several per cent will mean for their monthly payments.

The report comes as Ottawa tightened lending standards for mortgages Tuesday amid concern homeowners could get pinched as rates rise.

Households across the country are more indebted. The average debt per household rose to $96,100 in the third quarter of last year, with consumer and mortgage debt levels at record highs, the Vanier study said. That put the debt-to-income ratio at 145 per cent – the highest level since the annual study began 11 years ago.

“This really jeopardizes our financial resiliency to any economic shocks” such as a sudden job loss or reduced work hours – events that are still common as the labour market continues to churn, said executive director Clarence Lochhead in an interview. “People have lost a bit of spring in their financial shock absorbers when they carry large debt like this.”

Total debt per household advanced 5.7 per cent in real terms in the last year, and mortgage debt advanced 6 per cent.

“People have lost a bit of spring in their financial shock absorbers when they carry large debt like this.” — Clarence Lochhead of the Vanier Institute of the Family

Young, first-time home buyers are “clearly” taking on additional debt. “Many in this group have recently assumed high ratio mortgages at record low interest rates and with long amortization periods,” it said. “Will they be able to afford their monthly payments when interest rates go up? Many are already having problems.”

About two-thirds of people aged 18 to 34 would be squeezed if their pay cheque was delayed by even one week and many of these are the first-time home buyers, the study said.

More people are in arrears. The number of homeowners in arrears has risen to a seven-year high, according to Canadian Bankers Association statistics. Arrears – or the portion of mortgage holders who have gone three or more straight months without making a payment – climbed through the recession, though they were just 0.44 per cent in November.

More on mortgages

The Vanier Institute joined several economics in saying the Canadian housing market may be in a bubble. And higher interest rates, changes to mortgage rules and more new listings could burst the bubble, it warned.

Real estate assets comprise almost half – or 48 per cent – of the net worth of Canadian households, the highest in two decades.

“A significant housing correction would clearly damage the balance sheet of many households,” the Ottawa-based institute said.

Federal finance minister Jim Flaherty said Tuesday there are no definitive signs of a housing bubble.

Posted via web from Toronto Real Estate News | Blog

About Tariq Sultan
Dear Readers, I am a dedicated Toronto, Ontario based real estate professional who has been successfully meeting and exceeding the needs of his clients for past several years. I am actively involved in the insurance, financing, and mortgage industry. Real estate is not only my career – it is my passion. I strive to continuously provide my clients with exceptional service to ensure they are fully satisfied when it comes to their real estate needs. For any real estate related inquires contact me today, I will be happy to assist you. Best wishes, Tariq Sultan

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