Canadians have been getting an earful over the last few years about careless borrowing habits, which are allegedly fuelling a massive housing bubble and threatening to saddle our descendents with debt till the end of days.
It’s too soon to say whether that’s the case, but a new report by CIBC World Markets claims Canadians have been behaving better than previously thought. Instead of using the cash freed up by low interest rates to take family trips to Spain or upgrade the minivan, they’re increasingly playing it safe.
“What we found is actually more and more people are accelerating their mortgage payments and paying back principle. That’s wonderful, that’s good news,” says Benjamin Tal, deputy chief economist at CIBC.
According to the bank, which is one of the country’s largest mortgage lenders, between 30 and 40 per cent of households have taken advantage of low interest rates to accelerate their mortgage payments, which sets them up to take down that debt pile ahead of schedule.
Tal estimates that the average amortization period in the Canadian market is around 20 years, rather than the 25 years the Bank of Canada uses in its assumptions when it makes its pronouncements on the health of the economy. That translates into as much as $11 billion in mortgage principal payments that are currently not accounted for by the central bank.
It gets even better when you factor in the strength of the housing resale market and that retail sales have been robust lately. So Canadians are spending, but not borrowing excessively to do so, which throws a bit of cold water on the narrative that we’re a country living beyond its means.
If CIBC has crunched the numbers right, this means when interest rates inevitably start to rise, the impact won’t be as bad as the doomsday scenario of homeowners suddenly unable to afford their homes and rushing to sell them into a falling market.
Instead, they’ll have the option of stretching out their amortization, rather than swallowing higher payments that might crimp the family budget.
The bottom line: it reduces the risk of defaults if inflation suddenly goes haywire and interest rates skyrocket.
“It is in many ways suggesting that we will be able to tackle this kind of increase in interest rates without too much damage, at least the first 100 basis points,” says Tal.
Tal also takes comfort from an upward trend in credit scores, which he says are the strongest predictor of mortgage default.
Of course, this isn’t to say that we shouldn’t reserve some stress for the housing market, which does indeed appear to be a bit too hot in centers like Vancouver, Toronto and Calgary. And the current low interest rates being offered by banks simply can’t go on forever, even though it’s gone on much longer than most expected.
And there still is that pesky debt-to-income ratio from Statistics Canada, which is still up in the near-record neighbourhood of 164 percent, although some find fault with the gauge as it doesn’t factor in household assets.
But it appears Canadians can take some credit for not stretching their credit.
“I think people are mindful about one day rates will go up, and of the fact that we’re in a record low interest rate environment,” says Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals.”
“It’s an important issue and people should always be mindful of what their debts are.”