The fluctuating housing market can make purchasing a house a bit of a gamble. If you buy when prices are high and the value of your home goes down, most homeowners can just wait it out. Houses are long-term investments and eventually with time you know the market will rise again.
“If you bought at the market high and prices drop, you could be underwater on paper, which means you owe more than the home is worth. If you’re not planning to sell and you can meet your payments, you don’t lose,” says Scott Terrio, manager of consumer insolvency for debt relief experts Hoyes, Michalos & Associates. “It becomes a problem for someone who discovers they can’t carry the mortgage payment plus all their other debt, especially if they’ve lost a job, dealt with an illness or they’ve simply run out of credit.” In those instances, it may make fiscal sense for the homeowner to abandon their mortgage and walk away. The home goes into foreclosure — the home is turned over to the lender, who attempts to recover their investment by forcing the sale of the home and using the money to pay off most of the debt.
This happened frequently in the U.S. during the financial crash in 2008; lenders were forced to absorb the unrecovered debt. Could this happen in Canada? It’s not quite as simple here. “In Ontario and most other provinces, there are full recourse rules, which means you can’t walk away from your mortgage obligation without recourse from the lender, who can pursue mortgage shortfalls in court,” explains Terrio. However, homeowners can file a proposal or bankruptcy, which makes any shortfall unsecured (like other debt such as student loans, payday loans, car loans, line of credit and credit card debt). “Once a proposal or bankruptcy is filed, you can’t be sued for any shortfall, which is the difference between what you owe and what the lender can get for the house.”
What is the difference between filing a proposal and filing for bankruptcy? They’re both solutions to resolve debt and provide legal protection from creditors (for example, creditors stop wage garnishments). In bankruptcy, you surrender certain assets in exchange to discharge debt. When you file a proposal, you make an offer to settle debt for less than you owe.
“Proposals are filed more frequently with our clients now than bankruptcy,” explains Terrio. While you have to make a better offer to your creditor than what they would get if you filed bankruptcy, “it has less impact on your credit long-term and you can keep your belongings, which makes it a very realistic and favourable option for many.”
The volume of new mortgages across Canada has been slowing down in recent months, amid rising interest rates and tougher federal regulations, a new TransUnion report shows. But the country’s oldest homeowners are bucking that trend – big time.
Among Canadians aged 73 to 93, the so-called silent generation or pre-war generation, the number of mortgages issued between January and March of 2018 was up a whopping 63 per cent compared to the same period last year, TransUnion data shows. Baby boomers are also getting new mortgages, although the increase in loan originations among Canada’s 54- to 72-year-olds is a more modest 18 per cent.
That stands in stark contrast with what’s happening with the country’s first-time homebuyers and younger generations in general. Mortgage originations were down 19 per cent among millennials (ages 24-38) and 22 per cent among gen-Z (18-23).
Overall, the number of new mortgages issued between January and March was down 3.4 per cent compared to the same period last year. This follows at eight per cent drop in the last three months of 2017 compared to the last three months of 2016. (New mortgages include brand new loans, loans renewed at a different lender and refinancing.)
Older generations could be re-mortgaging or borrowing against their home equity in order to “support retirement or to financially support younger generation family members,” the TransUnion report reads.
Research shows that retirement expenses tend to skyrocket around age 80, due to health care and long-term care costs.
WATCH:Why women need to save more for retirement
But the pre-war generation is also joining forces with boomers to help the younger kin.
“We hear of parents and grandparents supporting their children and grandchildren, whether it’s student loans or buying a house,” Matt Fabian, director of financial services research and consulting for TransUnion Canada, told Global News.
That said, as large as the six-fold surge in new mortgages issued to Canada’s 70-to-90-year-olds may seem, the volume of mortgages in that age group remains very small, Fabian said. (The data does not include reverse mortgages, TransUnion said.)
Still, the numbers do suggest that the stricter mortgage rules introduced on Jan. 1 of this year are having a much bigger impact on newer generations.
“The stress-testing rules are about affordability,” Fabian said. Younger mortgage applicants may be either finding out that they don’t qualify or that they can’t get the amount and loan type they want, he added.
Older Canadians who have enjoyed remarkable home-equity gains in the last few years don’t have to worry about stricter standards on things like loan-to-value ratios, Fabian said.
The data also shows significant variations across cities. While new mortgages dropped by almost 18 per cent in Toronto, they remained virtually flat in Vancouver, with growth of less than one per cent in the first three months of 2018 compared to the previous year.
But new mortgage volumes rose in Ottawa (up 8.4 per cent) and Montreal (up 5.2 per cent), where relatively low real estate prices have been attracting an influx of buyers.
WATCH:How mortgage stress tests are affecting millennials
More credit cards and higher balances
Canadians may be having a harder time getting a mortgage, but they aren’t giving up their credit cards.
TransUnion reported a “surge” in the number of credit cards issued in the first three months of 2018, which was up 5.6 per cent year-over-year across all age groups.
“This represents a dramatic shift compared to an approximate 10 per cent decline year-over-year from [the first quarter of] 2016 to [the first quarter of] 2017,” the report said.
The average consumer now carries a balance of $4,200, the data shows. Collectively, Canadians now owe $99 billion through their credit cards.
Total non-mortgage debt still rising, although at a slower rate
Overall, the average Canadian had almost $29,650 in debt excluding mortgages in the period between April and June, an increase of almost four per cent compared to the same three months in 2017, TransUnion said.
“This is the third consecutive quarter where the quarterly change is less than the change seen in the previous year,” the report noted.
In other words, Canadians continue to borrow more, but at least the pace at which they’re piling on debt has slowed.
Source: Global TV – By Erica Alini National Online Journalist, Money/Consumer Global News
Here’s the litmus test for determining if you have too much debt: if your income was delayed, could you pay your monthly bills? “If you couldn’t meet those expenses, you’ve got too much debt,” says Doug Hoyes, licensed insolvency trustee for debt relief experts Hoyes, Michalos & Associates. “We often see our clients facing this situation. They might think the answer is to borrow to alleviate the immediate problem. But the solution to too much debt is not to get into more debt. You have to get off the hamster wheel.”
The cycle Hoyes is talking about goes something like this: Something happens to cause an initial shortfall. It might be that you get sick, injured, lose your job, split with your partner. You start to put too much on your credit cards and you can’t pay them off. “Then, you get an additional credit card and you continue to rack up more and more debt on your cards. The number of cards and balances keep going up.”
Now you have a problem, so you decide to solve it by consolidating your debt. You might try and apply for a line of credit, which you may not qualify for, or get a payday loan with monstrous interest rates. “Once you start getting payday loans, it’s very difficult to recover,” warns Hoyes. “In some instances, payday loans cost you $15 for every $100 you borrow. In order to pay it off, many of our clients have to get another payday loan.”
So how do you stop this cycle of debt? “Rather than continuing to add more to what you already owe, it’s important to stop borrowing and stop the bleeding,” says Hoyes. He suggests taking an inventory of what you owe and then making an honest budget to see if you can find a way to pay it back on your own. “You might also consider ways to add income rather than just deal with expenses. Perhaps you get a second job or a roommate to help with expenses.” In the likely situation where you discover you can’t do it on your own, consider talking with a Licensed Insolvency Trustee to help you find a way to pay off a few debts.
For most clients, the best way to deal with debt is a consumer proposal or bankruptcy, explains Hoyes. “In a consumer proposal, we make a deal to pay back considerably less than the amount owing. Instead of making minimum payments for decades or declaring bankruptcy — your last resort — with a consumer proposal, you pay an agreed amount that’s much less than what you owe over a five-year period. Then three years later, it comes off your credit report.”
As Hoyes explains, it’s not about consumers running from debt. “It allows them an opportunity to make manageable payments and ultimately, get a fresh start.”
The median household income in America is $53,657. Politicians draw $250,000 as the line between the middle and upper classes. And the true starting point of real wealth remains a cool $1,000,000. We asked four more or less typical men, each of whom earns one of these incomes, to tell us about the lives they can afford.
$1,000,000 Per Year – Tim Nguyen, 35
Location: Huntington Beach, California
Occupation: Business owner, CEO/cofounder of BeSmartee, a DIY mortgage marketplace
Family status: Married with a 9-month-old son
Homeowner? Renter? “I’m a homeowner. No mortgage.” (Price of home: $1 million.)
Do you keep a budget? We track every single penny that comes in and out of our bank account. And we give 6 percent of our money away to charity. We have a big heart for animals, children, the elderly, the underprivileged.
What’s a weekly grocery bill for you? I break it down monthly. We eat mainly at home. We spend around $1,200 a month.
One thing your family needs but can’t afford: There’s nothing that we need that we can’t afford. Anything reasonable I can afford.
One thing you want but can’t afford: The thing that keeps me up at night is wanting to retire my parents. There’s a certain dollar figure that would allow me to pay off all their debts. That’s my first goal: to retire my parents so they can be independent and just live their lives.
The last thing you bought that required serious planning: We budget our money all the time, so we’ve already been planning for everything—I could tell you exactly where all my money is going over the next five years.
Do you have credit cards? I have one credit card. It’s cash for points, so we charge everything on the card and pay it off at the end of the month.
How much debt are you carrying now? Less than 10 grand.
I’VE BEEN BROKE BEFORE. I’VE REFINANCED MY HOUSE TO PAY MY EMPLOYEES. I’VE BEEN THROUGH ALL THAT—THAT WAS ME WORRIED.
Saving for retirement? Yes. [I’ve put away] north of $5 million.
At what age would you like to retire? I’ll always be working. As far as working on a start-up, I want to be done with that in five or 10 years. But as far as working, investing in real estate, things of that nature, you can do that until you’re 90.
College plans for your kids? We set up a trust with our attorney where our kids will have money for college. But they’ll only get more than that if they achieve their milestones, such as getting a certain GPA or volunteering in the community. We want our kids to be good citizens. They can’t be spoiled brats. We want them to understand what it means to work and to earn your way to the top. We put the rules in place to help reinforce that.
Looking at your current career prospects, how much money do you think you’ll be earning in ten years’ time? My goal is to have a net worth of $150 to $200 million.
How happy are you on any given day, on a scale of one to ten? I’d say eight or nine. Lately, with the start-up, I’ve been putting in two to three hours more per day than I’d like, and that’s taking away from family time. So if I could get those two or three hours back, I’d be a happy man.
How often do you worry about money? Maybe once a week. I’ve been broke before. I’ve refinanced my house to pay my employees. I’ve been through all that—that was me worried. Now, because I’m able to forecast and plan my money better, there’s not as much worry.
How much money do you think you’d need to have the life you want? I need about 25 [million]. That includes retiring my parents, an upgraded home, and enough money to make sure my kids have funds available when they want to start their own businesses. There’s a certain amount of money you need to live the life you want. Beyond that, it’s really a game, and money is the scoreboard.
Do you think your taxes are too high? I’m happy with taxes. I had a really good year when I was 22 or 23—I made about 250 grand—and I came home and complained to my dad about it. I said, “I can’t believe I’m paying all those taxes! Half the money is gone!” And my dad said, “You should feel lucky that you live in a country where you can pay taxes”: He came from a communist-run country. Ever since that day, I never complain about my taxes.
4 Women with 4 Very Different Incomes Open Up About the Lives They Can Afford
$250,000 Per Year – Yakov Villasmil, 41
Occupation: Real Estate Agent
Family Status: In a relationship; one son, 10 years old
Monthly rent: $2,000
Do you keep a budget? Yes, I’m very organized with it. Overall, my fixed expenses are about $7,000 a month. They include rent and about $1,000 a month for transportation, $180 a month to the cleaning lady, $200 for gas for the vehicle, and a handful of little things—$300 a month for Netflix, Pandora, Skype, subscriptions like that.
What’s a weekly grocery bill for you? I would say about $200 a week.
AT THIS POINT IN MY LIFE, IF I HAD $600,000 YEARLY INCOME, I WOULD HAVE THE LIFE THAT I WANT TO BE LIVING. BUT THEN AGAIN, WHEN I GET THERE, I’LL WANT TO BUY THE JET.
One thing your family needs but can’t afford: Nothing.
One thing you want but can’t afford: I’m a fan of watches, and there’s a Cartier that just came out that’s about $10,000. It’s not that I can’t afford it; it’s just not a priority right now.
The last thing you bought that required serious planning: I spend money traveling every year, and that’s something I put some thought into. Last December, I went to Austria, Slovenia, and Italy.
Do you have credit cards? Fifteen.
How much debt are you carrying now? $7,700 on one card, and it should be paid off by the end of the month.
Saving for retirement? I am saving, but not for retirement. I’m saving up to buy an apartment building, which will give me another stream of income. My money is all in play right now to make more money. The kind of life that I want to live when I retire is not one I have to manage by having, you know, a million dollars and 3 or 4 percent [interest]. It’s not going to happen.
At what age would you like to retire? I don’t think that I want to retire.
But say you did: At what age would you be able to retire? I want to be financially free by age 50.
College plans for your kid? No, but it’s all part of making sound investments.
Looking at your current career prospects, how much money do you think you’ll be earning per year in 10 years’ time? In 10 years’ time, I want to have $50,000 a month from apartment buildings, and another $50,000 a month from the real estate business. A million-five per year is the goal.
How often do you worry about money? Every single day. Every single minute. I always want more, and every single day I’m thinking, “What’s the next move?”
How much money do you think you’d need to have the life you want? At this point in my life, if I had $600,000 yearly income, I would have the life that I want to be living. But then again, when I get there, I’ll want to buy the jet.
How happy are you, on a scale of one to 10? I’m a good nine every day.
Do you think your taxes are too high? You know what? No, I don’t think they’re too high. I remember I had a boss about 10 years ago who said, “You guys complain about the taxes being taken out—if you don’t want them to take that much, just make less.”
$53,000 Per Year – Michael Greene, 48
Occupation: Concierge for a property-management group
Family status: Married with 3 children (a 21-year-old stepson and 8-year-old twin girls)
Monthly rent: $1,000
Do you keep a budget?
We do. Because of the size of our family, we have to budget at least $150 per month for BJ’s [Wholesale Club]. BJ’s is our friend; we have to buy in bulk.
What’s a weekly grocery bill for you? Probably in the range of $100 to $125.
I’D LOVE TO STAY IN BROOKLYN, BUT RIGHT NOW THE ASKING PRICE IS BETWEEN $500,000 AND $600,000.
One thing your family needs but can’t afford: A ranch-style home, four to five bedrooms, two to three bathrooms. I’d love to stay in Brooklyn, but right now the asking price is between $500,000 and $600,000.
One thing you want but can’t afford: I’ve always liked Volvos. If I could get a big, six-seater Volvo, that would be nice. In my color: navy blue. With a little TV in the back for the kids.
The last thing you bought that required serious planning? We bought bedroom sets for ourselves and our girls four years ago. Our set was between $5,000 and $6,000, with the dressers and everything. Our girls’ little beds—which they’re about to outgrow now—we got a better deal for them: around $2,000 or $2,500. I had to go into my savings a bit to get it, but we got it. We got it done.
Do you have credit cards? Just one. A Chase Visa. I’m definitely on top of my monthly payments, and I try not to go anywhere past $300 to $400 a month. That would be stretching it. And I have to thank my wife for that. She helps me stay focused.
How much debt are you carrying now? No credit-card debt, but I definitely still have a student loan from the mid-nineties that I’m trying to bang out. I think I still have seven G’s left.
Saving for retirement? Yes, I am. Our company offers a 401(k) plan, and our union offers one, so I have two separate running retirement plans. Gotta do it. I don’t know how much is in there at the moment.
At what age would you like to retire? I’m 48 now. Realistically, I’d say I wouldn’t want to go past 60. But I think I’m looking at 60 before I’ll be able to retire.
College plans for your kids? We have a college plan in place for the girls. I put away money biweekly—$75 to $100.
How much money do you think you’ll be earning per year in 10 years’ time? I’d love to say I’ll be making double if not more than double what I’m making now.
How often do you worry about money? Money is not something that I stress over.
How much money do you think you’d need to have the life you want? I’m not a greedy guy. Because of my upbringing, where we learned how to do more with less, and with the times and the economy we live in now, my family and I could be very comfortable at $200 to $250K a year. I could be very comfortable with that.
How happy are you, on a scale of one to ten? Eight.
Do you think your taxes are too high? Yes. Yes. Yes. Yes.
The Poverty Line (Or: $7 An Hour Plus Tips) – Demetrius Campbell, 25
Occupation: Bar-back at the Signature Lounge in the John Hancock building
Family status: Single with two daughters, 7 and 4
Monthly rent: 30 percent of income through antipoverty nonprofit Heartland Alliance
Do you keep a budget? No, but I have been working on trying to recently. I know I have to pay bills for food, for clothes, gas. It’s a lot of things that go into budgeting. It’s hard to plan for, because you never really know what you’re going to need to spend money on. And the amount of money I make varies, because I work different hours. The biggest two-week check I’ve had so far is $250.
I’M IN A LOT OF DEBT. I HAVE TRAFFIC TICKETS, HOSPITAL BILLS, OLD PHONE BILLS. I’M PRETTY SURE THAT MY DEBT FROM THE TICKETS ALONE IS ROUGHLY $3,000.
What’s a weekly grocery bill for you? In a week, about $130 to $140—that’s when I have the money to spend. I’m on food stamps, and I get $400 a month through EBT.
One thing your family needs but can’t afford: I don’t really think about stuff like that. I just try to make do with what I have. I feel like I’m just working to pay for the bills. I don’t even have time to spend with my family—to take them out to certain places.
One thing you want but can’t afford: I’d buy a newer-model car. And every time those commercials come on TV—the Pillow Pets—my kids always ask for those. It’s discouraging, having to tell them all the time that we can’t afford things.
The last thing you bought that required serious planning: I bought a TV—a Black Friday deal. It’s a Vizio 39-inch. I paid like $250. I had to work for it. I saved up.
“Do you have credit cards? No.
How much debt are you carrying now? I’m in a lot of debt. I have traffic tickets, hospital bills, old phone bills. I’m pretty sure that my debt from the tickets alone is roughly $3,000. By the time you get the money to pay the ticket, the fine has doubled. Then you get another one and can’t pay that one. Like, I’m on a boot [booted vehicles] list, and I got the money to get off the list, but my car got towed that morning, so I had to pay half that money to get it out of the impound. It just keeps going like that.”
Saving for retirement? No. Retirement is a long ways from now.
At what age would you like to retire? As young as I can and still have money. Probably late 60s.
College plans for your kids? I’ve thought about it. Once I get all my debts paid off and I’m in a better place, I’ll start putting as much money as I can toward it. I’ll take steps to put myself in better standing.
How much money do you think you’ll be earning peryear in 10 years’ time? My goal is to triple what I’m making now.
How often do you worry about money? Always. Living like this is hard to do.
Does money ever keep you up at night? I can say that it has. It’s a lot of things building up—having the money when the bills are due, having a ticket, and not being able to pay it before it doubles.
How much money do you think you’d need to have the life you want? 50 to 60 thousand a year.
How happy are you, on a scale of one to 10? I’d say a seven or eight. But you might get lucky and catch me on 10 now and then.
‘We will start to see delinquency rates inching up a little bit, and debt probably slowing down,’ as Bank of Canada starts raising interest rates, credit agency says
Canadian delinquency rates, which have been declining since the last recession, will probably reverse and begin to climb by the end of 2018 as the central bank presses ahead with interest rate increases, according to the country’s largest credit reporting firm.
Regina Malina, senior director of analytics at Equifax Canada, predicts late payments on the country’s $599 billion (US$455 billion) of credit card, auto and other non-mortgage consumer debt will begin to move “modestly higher” by the end of this year.
“Our prediction is that we will start to see delinquency rates inching up a little bit, and debt probably slowing down,” Malina said last week in an interview.
The delinquency rate — which measures the number of payments on non-mortgage debt that were more than 90 days past due — was 1.08 per cent in the first quarter, up slightly from the fourth quarter but still close to the lowest level since the 2008-09 recession.
The Toronto-based analyst declined to estimate how high delinquencies will climb, saying it depends on the pace of interest rate increases and what happens in the trade battle between the U.S. and Canada. She cited the experience in Alberta, where delinquency rates rose in some instances 20 per cent or 30 per cent on a year-over-year basis after the oil-price collapse. Such an extreme case, however, isn’t what Equifax is predicting. “It will only happen if we start seeing deterioration in employment numbers,” she said, adding delinquencies should remain “still very low,” and “they’re just going to start inching up a little bit, probably not double digits.”
Household credit has ballooned to unprecedented levels in Canada, as in many other developed countries, amid historically low interest rates. That hasn’t posed too many difficulties so far, because the economy and the labour market have generated solid growth, allowing people to handle servicing costs. But with the Bank of Canada intent on raising rates and the U.S. and Canada engaged in a tit-for-tat tariff fight, that could change.
A red flag in the Equifax data was a decline in the share of people who completely pay off their credit cards each month. The 56 per cent who did so in the first quarter matched the fourth-quarter number and was down from as high as 59 per cent last year. It’s a small but important detail, according to Malina.
“The changes aren’t big, but when they’re consistent and we see it for two or three quarters, we start to believe it,” she said. “Given that less people are making their credit card payments in full, and those people are usually people with lower delinquency rates, we might be seeing overall delinquency rates deteriorating.”
Consumer debt including mortgages was $1.83 trillion in the first quarter, up 0.4 per cent from the end of 2017 and 5.7 per cent from the same quarter a year earlier, Equifax said.
Excluding mortgages, Canadians carry an average of $22,800 each in debt. Some other highlights from the report include (all figures exclude mortgage debt):
Those between the ages of 46 and 55 have the highest average debt loads, at $34,100.
That age group is also seeing the largest increase in debt, year-over-year, at 4 per cent.
Of nine cities listed, Fort McMurray, Alberta, had the highest average debt levels, at $37,800, as well as the highest delinquency rate, at 1.72 per cent.
Vancouver and Toronto saw the highest rate of debt accumulation in the first quarter, with 5.2 per cent and 5 per cent growth from a year earlier Montreal is the least indebted city, with average debt loads at $17,300 Ontario and British Columbia have the lowest delinquency rates, at 0.95 per cent and 0.84 per cent. Nova Scotia, at 1.74 per cent, had the highest.
Scott Hannah says low borrowing costs and rising home prices have lured Canadians into a debt trap they may not escape if looming economic threats materialize.
Hannah, president of the Credit Counselling Society, is seeing an influx of clients as higher financing costs begin to bite and people find it harder to manage. Phone calls were up 5.3 percent in the first quarter from a year earlier, while online chats increased 40 percent.
He says with debt loads at a record and little in the way of savings to fall back on, Canadians may be “caught off guard” if housing markets cool significantly or North American Free Trade Agreement talks go sideways.
“We’ve been in a perfect storm for a number of years” where low interest rates encourage borrowing and discourage saving, Hannah, 60, said by phone from the Vancouver suburb of New Westminster. “People have been lulled into a false sense of security.”
Hannah’s organization can help people set up a debt management program or find a licensed insolvency trustee. He’s sounding the alarm as rising interest rates and stricter borrowing rules threaten to squeeze households even further. The Bank of Canada is expected to raise its benchmark rate twice more this year and it’s next decision is April 18.
Hannah’s colleagues dubbed him “Dr. Debt” after he received an honorary degree in 2012 from University Canada West, a private business school, for his “distinguished service in the field of credit counseling.” Prior to establishing the non-profit, registered charity in 1996, he worked for 11 years at Equifax Canada, a credit reporting company, but decided “a nice title and a good salary doesn’t make you happy,” so he left to find something that “made a difference.”
He found it by helping people get relief from their creditors. As Hannah tells it, during the early 1990s, the provincial debtor assistance program in British Columbia was cutting back just as bankruptcy rates were rising. A group of banks, credit unions and department stores tried and failed to establish a complementary service. Hannah offered to raise the necessary funds, so long as he was allowed to run the organization.
Drop in the Bucket
Twenty-one years later, the society — with offices from the provincial capital in Victoria to Ottawa — has assisted more than half a million people. The average client is 43 years old, has C$31,000 in outstanding debt and seven creditors. More than half are female. Average gross monthly income is C$5,200, and housing costs consume 42 percent of their net income. The society’s clients repaid C$51 million last year, up about 6 percent.
It’s still a drop in the bucket.
Canadian household credit totaled a record C$2.13 trillion at the end of February, roughly doubling since 2006, central bank data show. Residential mortgages account for 72 percent of that. The rest includes credit cards, lines of credit and auto loans.
People carrying large debt loads still feel ahead of the game because home prices keep rising, Hannah said. “What happens when the economy has a downturn, like in Alberta. We know what happened. We’re still seeing the impact of that,” he said, adding people in the oil-rich province were “caught off guard, and because of a lack of savings, many people lost their homes, had to sell their assets and start over again.”
Read more about cracks starting to show in the quality of Canadian credit
Some observers argue Canada’s household debt isn’t a problem because asset ratios and home equity levels are also high and the country’s labor market is strong. A report from the Canadian Banker’s Association this week showed the national mortgage arrears rate through January was 0.24 percent, close to the lowest in three decades.
Hannah doesn’t buy it. Low arrears and delinquency rates “don’t tell the whole story,” because a robust housing market is masking financial strains, he said. “If a person’s had difficulty keeping up with the mortgage payment, it’s been relatively easy just to sell your home,” said Hannah. “What happens though when you have a tight market and it’s not as easy to sell your home? That’s when you’ll see delinquency rates start to rise.”
The Toronto housing market’s rotten January has thrown a scare into veteran mortgage broker John Cocomile.
A lot of Mr. Cocomile’s business in recent years has been mortgage refinancings, which are like a financial-stress reducer. When your household debt gets too high, refinancing takes the pressure off by folding all your borrowings in with your mortgage. What worries Mr. Cocomile is that the latest developments in housing make it much harder to refinance.
We’ve seen household-debt levels push ever higher in recent years, with no evident repercussions in terms of more people being unable to repay what they owe. Now that refinancings are no longer an easy fallback, Mr. Cocomile thinks we’ve hit an inflection point where more people will find their debt unmanageable. This could be the year debt gets messy.
A big reason why Toronto home sales fell 22 per cent compared with January, 2017, was the introduction of new mortgage regulations designed to make the housing market more stable going forward.
The rules include a stress test that applies to anyone with a mortgage that isn’t insured against default. Typically, this means people with a down payment of 20 per cent or more and people who are refinancing.
The stress test is designed to see if borrowers can afford interest rates that are higher than the abnormally low levels of today. At Mr. Cocomile’s office, a lot of people are flunking the test. He’s had 10 people contact him about refinancing this year who did not end up qualifying. “All 10 would have qualified a year ago,” he says.
Meanwhile, debt loads are getting heavier to carry. The Bank of Canada has increased its trend-setting overnight rate three times since last summer, and the cumulative rate increase on some kinds of debt is a hefty 0.75 of a percentage point.
In the past few years, Mr. Cocomile would do roughly 60 refinancings a year for people with an average $70,000 in non-mortgage debt that he summarized as “a smattering of credit-card debt, plus lines of credit.” The usual procedure was to put them in a new mortgage that included credit-card and line-of-credit debt. The logic here is that the mortgage has a much lower interest rate than other forms of debt, and payments are manageable because they’re stretched over the life of the mortgage.
Even so, Mr. Cocomile finds that clients usually have to go with a 30-year amortization in their refinanced mortgage. Paying off your mortgage over 30 years isn’t possible when you have an insured mortgage, but you can still do it with a down payment of 20 per cent or more.
Refinancings in which people increased the amount they owe accounted for 21 per cent of the one million or so new mortgages issued in 2016, the most recent numbers from Canada Mortgage and Housing Corp. show. That’s an increase of 3.8 per cent over the previous year.
You’re usually allowed to refinance no more than 80 per cent of the value of your home, a modest limitation in hot real-estate markets where rising prices have steadily handed people more home equity to work with. “People could refinance because the value was there,” Mr. Cocomile said. “They call me and say, ‘My neighbour’s house just sold for $1.7-million, can I pull some equity out? I want to do a refi.'”
Toronto real estate’s rotten January suggest people may be a bit disappointed in what their homes are worth now. The price of detached homes in the city fell 9 per cent on a year-over-year basis, even as condo prices rose 14.6 per cent. Mr. Cocomile finds that home appraisers are reacting to the current environment by getting more conservative with their assessments of how much homes are worth.
Refinancing your mortgage by folding in other debts makes sense in theory because you’re converting higher-rate debt into a mortgage, which typically has a very low rate. But a refinance does nothing to address the behaviour that leads people to over-borrow. In fact, some people have exploited rising house prices by doing multiple refinancings over time to ease their debt loads.
It’s arguably a good thing that refinancings are harder to get in 2018. With rates rising, it’s time for households to attack their debt, not accommodate it.