Why it’s time to take a closer look at mortgage debtJul 14, 2016
Earlier this month, the federal Office of the Superintendent of Financial Institutions (OSFI) made a rare move in writing an open letter to the mortgage industry, noting that it would “place an even greater emphasis” on certain areas of the lending market. In regards to mortgage lenders, the OSFI stated “With Canadian household debt levels at all-time highs, persistently low interest rates and rapid house price increases in some areas, the prudential risks and vulnerabilities for financial institutions have increased.”
But it isn’t just the banks that could be vulnerable to risks in the mortgage debt market. The Bank of Canada (BoC) had previously mentioned “elevated household indebtedness” as a key vulnerability to the Canadian economy, with 15 per cent of new homebuyers taking on more than 4.5 times their annual income in mortgage debt. While interest rates are expected to remain low for the foreseeable future, even a slight increase could be costly to someone carrying too much debt.
Sure enough, the OSFI raises the rising rate concern in its letter. “Relying on the prevailing posted five-year mortgage rate to test a borrower’s ability to service its obligations in a rising interest rate environment does not represent a sufficiently conservative stress test,” they said. In other words, you shouldn’t simply consider your ability to make payments at your current mortgage rate, but try stress-testing your debt to see if you could manage once rates rise.
Time to stress-test your mortgage debt
Fortunately, there are online tools that can help you with this. The Financial Consumer Agency of Canada (FCAC) has a mortgage calculator that lets you easily adjust the interest rate to see how a rise in rates would affect your monthly mortgage payment. You can also choose weekly, bi-weekly, or semi-monthly payments from the dropdown to see what you could be paying by changing your pay period.
If you’re considering buying a home, the FCAC’s mortgage qualifier tool can help you see whether you would be approved and calculate the amount of mortgage debt you would have to repay. Note that this tool suggests you would likely be denied a mortgage for a property worth 4.5 times your annual income, because you’d be carrying too much debt.
Now’s the best time to pay down mortgage debt
With the BoC officially keeping its overnight lending rate at 0.5 per cent for at least the next few months, home prices are expected to continue rising this year. This is good news if you already own a home—less so if you’re looking to buy one in Vancouver, where prices rose nearly 25 per cent over the past year.
Your best bet would be to take advantage of the low rates to pay off your mortgage sooner. Even switching from monthly to bi-weekly payments will save you interest charges over the long run. And if you’re considering taking on a mortgage valued at 450 per cent of your income, you might want to look at paying off other debts first.
What’s your timeline to pay off mortgage debt? Join the conversation on Twitter using the hashtags #BDOdebtrelief #LetsTalkDebt