How record low interest rates are helping us pay off our mortgages faster
Posted on Jun 12, 2014 in Mortgage Market Updates and NewsGarry Marr
Record low interests rates are helping Canadians pay off their debt faster, but cheap borrowing costs are not enough to overcome the red hot housing sector, according to a new survey.
The Canadian Association of Accredited Mortgage Professionals says 35% of Canadians were able to bump up their payments in the last year, some of them taking advantage of a renewed loan at a lower interest rate. That lower rate allows them to apply more of their monthly payment to principal as opposed to just interest.
“There are people comfortable with what their payments are when they are renewing and [the lower rate] becomes an additional payment,” said Jim Murphy, chief executive of CAAMP.
A $250,000 mortgage at 4%, amortized over 25 years, has a monthly mortgage payment $1,315.06 but if you lower the rate to 3% — the going rate on a five-year rate mortgage — your monthly payment drops to $1,183.12. Keep the payment the same and that extra $131.94 can be applied to principal which will ultimately mean your loan is paid off more quickly.
CAAMP found in its May survey that the average mortgage rate of a Canadian homeowner is 3.24%, that’s down from 3.5% a year ago. It said the renewal rate for what it called “recent” mortgages was down to 3.02% on average.
The group’s statistics show most people are doing better on renewal. Of the 2.2 million borrowers who have renewed or refinanced in the past year, 1.2 million saw their rate fall. Of the 750,000 who saw an increase, the rate was negligible. In the entire country, only 4% of borrowers have an interest rate of 5% or more.
Despite all these great deals on mortgages, debt continues to climb. A report from Dominion Bond Rating Service says it’s now $1.2-trillion and counting and CAAMP agrees it climbed 5% year over year.
“This is a reflection of overall real estate activity,” said Mr. Murphy, noting CAAMP’s forecast is for a slowdown in new construction which should slow down mortgage growth.
Will Dunning, chief economist with CAAMP, said he doesn’t have exact data but his sense is some of the reason for faster payments of mortgages is declining interest rates. Income growth could also be a reason for people increasing their payments, he said.
PAYING OFF YOUR MORTGAGE FASTER
Actons taken in the past year to shorten amortization perids
by Period of Purchase
Period of Increased Made a Increased Took one Took
purchase amount of lump sum frequency or more of none of
payment payment of payments these actions these actions
2000-2004 19% 14% 4% 33% 67%
2005-2009 18% 15% 6% 35% 65%
2010-2014 15% 16% 7% 35% 65%
periods 16% 14% 7% 35% 65%
Source: Canadian Association of Accredited Mortgage Professionals
Andrew Barr / National Post
The survey found, of all borrowers, 16% increased the amount of their payment to shorten the length of their loan, a category that would reflect consumers taking advantage of lower rates. Another 14% had made a lump sum payment while 7% increased the frequency of their payments.
“There are a lot of people paying more than they need to be paying,” said Mr. Dunning.
The flip side is that 11% of homeowners took equity out of their homes in the past year with the average amount $51,000. That translates to total a equity take of $53-billion.
The No. 1 reason was debt consolidation at $16.9-billion, followed by renovation or home repair at $12.5-billion, $6.6-billion for purchases including education and $3.3-billion classified as “other.” Mr. Murphy said with debt consolidation occupying the top spot, it is clear consumers are taking their obligations seriously.
David Madani, an economist with Capital Economics, said you really need to quantify how much debt paying people are paying down before you can say what the impact will be.
“I think it is happening,” said Mr. Madani, a noted housing bear who continues to call for a 25% correction. “But I think what is being described is that people are also trading up and taking on more debt.”
Ron Cirotto, who runs amortization.com, jokes he is surprised anybody is worried about their mortgage anymore. “It seems like [rates are] going to go into the negative soon,” he laughs.
In the interim, he’s a strong proponent of using the opportunity of low rates to keep your payment the same and using the difference to pay down debt. “It’s a no-brainer, if you have been doing $500 per month for the last five years and the rate drops, why would you want to drop your monthly payment?” says Mr. Cirotto.
Still, he also gets the lure of the larger house and the extra debt that entails. “I have to admit myself when I bought my [current house], I did it just after I paid off my previous house,” he said. “Everybody does it, so I’m not throwing stones.”