Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
Every quarter we’re bombarded with surveys about how huge swaths of our population are just one paycheque away from insolvency.
But those stats usually encompass the whole population. Seldom do they show us how close homeowners are to the edge, financially.
With rampant inflation, rocketing interest rates and escalating home price risk, it’s vital to understand homeowner’s cash flow stability. I asked MNP Ltd., an insolvency practice, what data it had on this topic.
The numbers ain’t pretty
According to the MNP Consumer Debt Index created by Ipsos, of those planning to renew a mortgage in the next 12 months:
· 15 per cent say they are not financially prepared to deal with a rate increase of one percentage point;
· 34 per cent say they already don’t make enough to cover their bills and debt payments;
· 46 per cent say they’re $200 away or less from not being able to meet all of their financial obligations (versus 49 per cent of the general population);
· 42 per cent say that rising rates could drive them closer to bankruptcy;
· 50 per cent say they regret the amount of debt they’ve accumulated.
Of our roughly 10 million homeowner households, it’s not a wild stretch to speculate that at least a million or two might be in over their heads. That’s not to say that many will default. They won’t. But it may soon be Kraft Dinner time for many in that group.
“Canadians are currently taking on significantly larger mortgages to address escalating prices,” says Allison Van Rooijen, vice-president of consumer credit at Meridian Credit Union Ltd. “That’s putting pressure on their personal balance sheet.”
“This trend has now become table stakes in the market and likely will only continue,” she adds.
In general, things aren’t as bad as they seem. When responding to surveys, people often portray their circumstances as more dire than in reality. Indeed, the average mortgage renewer claims they have about $883 left over at the end of every month, says MNP. But averages tend to hide the problem cases, so the above numbers shouldn’t be dismissed.
If we didn’t have record-low unemployment and folks didn’t have so much equity to fall back on, financial system regulators would have much more reason to lie awake at night. The question is, with Canadians’ debt burdens climbing relentlessly, rates surging and incomes not keeping pace with inflation, what happens if home prices stumble and equity shrinks?
Or, what happens if the next downturn is more painful than the “modest” recession that some expect in 2024 or 2025?
If you’re a mortgagor on the edge, and assuming that selling to downsize or rent is not an option, start thinking a few moves ahead.
Pre-emptive steps may include:
Extending your amortization
Even if you have to pay a one-percentage-point higher rate, going from a 15-year to a 30-year amortization can cut your monthly payments by more than 30 per cent. And yes, you’ll likely pay a higher mortgage rate than what you have now, if you must refinance today. Some lenders can even refinance you into interest-only payments if your cash flow is tight, but you won’t like the interest rate.
Consolidating debt
If you’ve got to do it, do it while home values are still high. Refinancing can slash your payments and keep you from becoming a stress beast. You might even want to take out a little extra to put in an emergency fund.
Adding a HELOC
Having an emergency source of liquidity lowers your blood pressure, at least in this author’s non-medical opinion. That’s assuming you don’t blow your HELOC on stupid stuff. Secured credit line rates are currently as low as prime – 0.15 per cent – but you’ll need excellent credit, provable income and enough equity. The minimum equity is 20 per cent but you’ll need more than that if you want to have credit available. Just know that if home prices dive, your credit score slips, you borrow more than 80 to 90 per cent of your available limit and you’re not making principal payments, the lender could potentially freeze any new borrowing. Banks monitor HELOCs much more closely than in olden days.
Renting part of the house
If it’s an option – given your home layout, lifestyle, municipal rules, etc. – consider a renter. It creates more cash flow and cuts your debt-to-income ratio. Just do yourself a favour and do a full background check on any renter, including credit, employment and online searches (criminal record checks are often prohibited). And phone two references.
Getting a side hustle
Try this for a year or two. Sacrifice some lifestyle to develop another source of income. Even a 10 to 15 per cent income boost can pound away at your debts and firm up your credit profile within six to 12 months – in case you have to mortgage elsewhere in the future.
Rates this week
As of Wednesday, Canada’s five-year bond yield was down 23 basis points from Friday’s high. That takes some pressure off fixed rates, which rose again this past week by 10 to 20 basis points. (There are 100 basis points in a percentage point.)
The difference between the best uninsured five-year fixed and variable rates now sits at 145 basis points.
Rates are as of Wednesday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
Robert McLister