Sep 22, 2023
Longer mortgage amortizations put cash-strapped homeowners on a treadmill
, BNN Bloomberg
Supply isn’t the only factor affecting housing affordability: Kershaw
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A reckoning is well underway for Canadians lured by cheap and easy housing market money following a nearly five per cent hike in interest rates in less than two years.
Homeowners who locked into fixed-term mortgages with rates as low as two per cent a few years ago are facing the grim reality of renewing at over seven per cent.
The pain is worse for variable-rate borrowers. A new report from RATESDOTCA found someone taking a five-year insured $500,000 variable-rate mortgage in 2021 would be paying $23,579 more in cumulative interest compared to a fixed-rate mortgage.
In many cases, regular mortgage payments for homeowners have more than doubled as a result. For those who can’t manage that burden the only option is to stretch out the amount of time it takes to fully own their homes.
WELCOME TO AMORTIZATION NATION
Longer amortization periods mean a smaller portion of regular payments goes toward the principal and a whole lot more goes to the bank in interest.
Obviously, the banks love the idea of amortizations beyond the typical 25 years. Earlier this month, the federal banking regulator threw cold water on 70-year amortization periods, but it stands to reason borrowers will be paying more for longer.
And that’s the dirty little secret that has borrowers on a treadmill and the banks wringing their hands. The banks don’t give a hoot about how much or how long it takes for the debt to be paid off as long those regular payments keep coming.
The banking term is “debt serviceability” and is measured by the much-touted household debt-to-income ratio. The average Canadian household debt-to-income ratio has skyrocketed to a frightening $184.5 for every dollar of disposable income, compared to 90 cents in the 1990s.
An old saying in the finance industry goes something like: if a customer can’t make a mortgage payment it’s their problem. If the entire neighbourhood defaults, it’s the bank’s problem.
The debt-to-income ratio is more a tool to gauge the health of the economy and whether the bank has a problem. It might not mean much for young Canadians willing to commit a large portion of their income to accumulate equity in their homes. A home is still a good investment.
PAYING DOWN DEBT TO INCREASE YOUR NET WORTH
What is really important for individuals is how quickly debt can be reduced and eventually eliminated as they accumulate equity in a home and other savings.
The success of that balancing act can be measured by determining your net worth over time and setting benchmarks to monitor progress. The measurement of net worth is basically assets (equity you own) minus liabilities (debt you owe).
Net worth can be increased by simply lowering debt. That includes mortgages, student loans, consumer loans or credit card balances. More of your dollars can go toward lowing the principal and speeding up the process by consolidating high interest debt into one low interest loan. Mortgages usually have the lowest interest rates because they are secured by physical property, and that’s where a home equity line of credit (HELOC) can be your best option.
The other half of the net worth challenge is growing your assets. While the definition of debt is pretty straightforward, assets can be open to interpretation.
When setting a net worth goal, it’s how assets can hold or grow their value that counts. Include savings in registered retirement savings plans (RRSP), tax-free savings accounts (TFSA), company pensions and any other savings vehicles.
Assets also include the appraised value of your home and any other real estate.
Business owners can also include their portion of equity in their businesses.
Works of art, or collections that hold or grow their value should also be included.
The final tabulation of your net worth – negative or positive – doesn’t matter as long as it’s heading in the right direction.
Homeowners who locked into fixed-term mortgages with rates as low as two per cent a few years ago are facing the grim reality of renewing at over seven per cent.
The pain is worse for variable-rate borrowers. A new report from RATESDOTCA found someone taking a five-year insured $500,000 variable-rate mortgage in 2021 would be paying $23,579 more in cumulative interest compared to a fixed-rate mortgage.
In many cases, regular mortgage payments for homeowners have more than doubled as a result. For those who can’t manage that burden the only option is to stretch out the amount of time it takes to fully own their homes.
WELCOME TO AMORTIZATION NATION
Longer amortization periods mean a smaller portion of regular payments goes toward the principal and a whole lot more goes to the bank in interest.
Obviously, the banks love the idea of amortizations beyond the typical 25 years. Earlier this month, the federal banking regulator threw cold water on 70-year amortization periods, but it stands to reason borrowers will be paying more for longer.
And that’s the dirty little secret that has borrowers on a treadmill and the banks wringing their hands. The banks don’t give a hoot about how much or how long it takes for the debt to be paid off as long those regular payments keep coming.
The banking term is “debt serviceability” and is measured by the much-touted household debt-to-income ratio. The average Canadian household debt-to-income ratio has skyrocketed to a frightening $184.5 for every dollar of disposable income, compared to 90 cents in the 1990s.
An old saying in the finance industry goes something like: if a customer can’t make a mortgage payment it’s their problem. If the entire neighbourhood defaults, it’s the bank’s problem.
The debt-to-income ratio is more a tool to gauge the health of the economy and whether the bank has a problem. It might not mean much for young Canadians willing to commit a large portion of their income to accumulate equity in their homes. A home is still a good investment.
PAYING DOWN DEBT TO INCREASE YOUR NET WORTH
What is really important for individuals is how quickly debt can be reduced and eventually eliminated as they accumulate equity in a home and other savings.
The success of that balancing act can be measured by determining your net worth over time and setting benchmarks to monitor progress. The measurement of net worth is basically assets (equity you own) minus liabilities (debt you owe).
Net worth can be increased by simply lowering debt. That includes mortgages, student loans, consumer loans or credit card balances. More of your dollars can go toward lowing the principal and speeding up the process by consolidating high interest debt into one low interest loan. Mortgages usually have the lowest interest rates because they are secured by physical property, and that’s where a home equity line of credit (HELOC) can be your best option.
The other half of the net worth challenge is growing your assets. While the definition of debt is pretty straightforward, assets can be open to interpretation.
When setting a net worth goal, it’s how assets can hold or grow their value that counts. Include savings in registered retirement savings plans (RRSP), tax-free savings accounts (TFSA), company pensions and any other savings vehicles.
Assets also include the appraised value of your home and any other real estate.
Business owners can also include their portion of equity in their businesses.
Works of art, or collections that hold or grow their value should also be included.
The final tabulation of your net worth – negative or positive – doesn’t matter as long as it’s heading in the right direction.
