There are increasing indications that our reputation of being a financially conservative in Canada is more myth than reality. As a group, we’re taking on more debt than ever before and finding ourselves with less of a personal safety net should the economy take a dive. Since 2001 the number of people over 60 that still have a mortgage has been steadily increasing, and the mortgages that we all hold are of more and more exotic varieties. From todays Vancouver Province: Why we’re up to our necks in debt.
A rash of recent reports paint a scary picture of Canadians as spending like drunken sailors, leading to the prickly question of whether we should be forced to save money.
A Statistics Canada study showed Canadians are finding themselves with two mortgages and deeper in debt than at any time in their lives. They are increasingly house poor, and with housing values sliding, they often owe more on their properties than they’re worth.
The StatsCan study came out at the same time that the Office of the Superintendent of Bankruptcy Canada reported that personal bankruptcies reached their highest level in more than four years during April, up 19.3 per cent over the previous month and 18.3 per cent over the previous April.
And things will only get worse if recent numbers showing a gross domestic product decline during the last quarter continue, signalling an economic downturn, and if unemployment rates should start to rise.
As it is, mortgage payments make up 37 per cent of average household spending in 2007, up from 32 per cent a year earlier.
And those mortgages are getting more ‘interesting’. The common refrain that the Canadian housing market is not as vulnerable to downturn as the US market because we don’t have ‘sub-prime’ mortgages is only part-true. What we do have is an mortgage insurance market that was liberalized in 2006 and has dramatically changed the landscape in the last few years with the introduction of zero-down, 40 year terms and adjustable ‘teaser’ rate mortgages:
With interest rates dropping, consumers might consider a front-loaded variable- rate mortgage. This option gives you a larger-than-normal discount from the prime interest rate for an initial period, say six months, before you decide whether to lock into a fixed rate.
Longer amortization periods, now up to 40 years, also are new. Holt estimates longer-term mortgages now account for three quarters of monthly insured purchase applications in Canada, with 40-year products accounting for half of that.
So will following the US lead into the area of ‘exotic’ mortgages lead to a similar result? Only time will tell, but it is interesting to see that this topic seems to be getting more attention within the government. That first article had this bit of info that was new to me:
Finance Minister Jim Flaherty recently suggested it might be wise to outlaw 40-year mortgages.
With up to a third of new mortgage applications opting for the longest term, removing that option could have a dramatic impact on our housing market at a time when it appears to be already slowing due to affordability concerns.