Welcome to Mortgage Rundown, a quick overview of the Canadian home finance landscape from mortgage strategist Robert McLister.
Every quarter we are bombarded with surveys about how large sections of our population are just one paycheck away from insolvency.
But those statistics generally cover the entire population. They rarely show us how close homeowners are to the edge, financially.
With rampant inflation, rising interest rates and rising home price risk, it is vital to understand the stability of a homeowner’s cash flow. I asked MNP Ltd., an insolvency practice, what data they had on this issue.
Numbers aren’t pretty
According to the Ipsos MNP Consumer Debt Index, of those planning to renew a mortgage in the next 12 months:
· 15 percent say they are financially unprepared to deal with a one percentage point rate increase;
· 34 percent say they no longer earn enough to cover their bills and debt payments;
· 46 percent say they are $200 or less short of being able to meet all of their financial obligations (vs. 49 percent of the general population);
· 42 percent say raising rates could bring them closer to bankruptcy;
· 50 percent say they regret the amount of debt they have accumulated.
Of our roughly 10 million homeowner households, it’s not an exaggeration to speculate that at least a million or two could be in over their heads. That is not to say that many will default. They will not. But it may soon be Kraft dinner time for many in that group.
“Canadians are currently taking on significantly larger mortgages to deal with escalating prices,” says Allison Van Rooijen, vice president of consumer credit at Meridian Credit Union Ltd. “That’s putting pressure on your personal balance sheet.”
“This trend has now turned into table betting in the market and will likely continue,” he adds.
In general, things are not as bad as they seem. Responding to surveys, people often describe their circumstances as more dire than reality. In fact, the average mortgage renovator claims they have about $883 left over at the end of each month, MNP says. But averages tend to hide problem cases, so past numbers shouldn’t be discounted.
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If we didn’t have record unemployment and people didn’t have as much equity to fall back on, regulators of the financial system would have a lot more reason to stay up at night. The question is, with Canadians’ debt burdens rising relentlessly, rates rising, and incomes not keeping pace with inflation, what happens if home prices falter and equity shrinks?
Or, what if the next recession is more painful than the “modest” recession some expect in 2024 or 2025?
If you’re a borderline mortgagor, and assuming downsizing or renting isn’t an option, start thinking about some moves ahead.
Preventive steps may include:
Extension of your amortization
Even if you have to pay a rate one percentage point higher, going from a 15-year amortization to a 30-year amortization can lower your monthly payments by more than 30 percent. And yes, you will likely pay a higher mortgage rate than you do now, if you must refinance today. Some lenders may even refinance you with interest-only payments if your cash flow is limited, but you won’t like the interest rate.
If you have to, do it while the home’s value is still high. Refinancing can dramatically lower your payments and keep you from becoming a stressed beast. You may even want to take out a little more to put in an emergency fund.
Add a HELOC
Having a source of emergency liquidity lowers blood pressure, at least in the non-medical opinion of this author. That’s assuming you don’t spend your HELOC on stupid things. Rates on secured lines of credit are currently as low as prime (0.15 percent), but you’ll need excellent credit, verifiable income, and sufficient capital. The minimum equity is 20 percent, but you’ll need more than that if you want credit available. Just know that if home prices plummet, your credit score drops, you’re borrowing more than 80 to 90 percent of your available limit, and you’re not making principal payments, the lender could potentially freeze any new loans. Banks monitor HELOCs much more closely than in the old days.
Rent part of the house
If it’s an option, given your home design, lifestyle, municipal regulations, etc., consider a renter. Create more cash flow and lower your debt-to-income ratio. Just do yourself a favor and run a full background check on any renter, including credit, employment, and online searches (criminal background checks are often prohibited). And phone two references.
Get a side hustle
Try this for a year or two. Sacrifice some lifestyle to develop another source of income. Even a 10 to 15 percent increase in income can pay off your debts and strengthen your credit profile within six to 12 months, should 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 last week by between 10 and 20 basis points. (There are 100 basis points in a percentage point.)
The difference between the best five-year fixed and variable rates without insurance now stands at 145 basis points.
Rates are as of Wednesday from providers who post rates online and lend in at least nine provinces. Secured rates apply to those who buy with less than a 20 percent down payment, or who switch a pre-existing secured 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.