Payment Procrastination: Why Canadians Aren’t Worried About Their Mortgages

Not Worried

Despite repeated warnings from the Bank of Canada, Canadians seem to be in no particular hurry when it comes to clearing away their mortgages, according to recent research from CIBC.

Historically low interest rates are driving this trend, and so is the idea of ‘good’ debt – a notion that didn’t really exist 25 years ago.

While slightly more than half of homeowners with mortgages (55 per cent) say they’re  doing something to pay their mortgages down sooner, a similar poll last year found that more than two-thirds (68 per cent) were taking steps to accelerate their repayments.

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Paying the Mortgage is No Longer Priority

In fact, CIBC reports, rather than try to work off their mortgage debt, Canadians are spending more this year on other items such as home renovations (up 30 per cent from a year ago), and summer vacations (up 20 per cent from last year).

So why isn’t everyone whittling away at their mortgage whenever they can?

Well, they could be tackling even more expensive debt. If you’ve got an outstanding balance on a credit card, for instance, that’s always the best place to start. Or maybe they think they can do better elsewhere — particularly with rates at these levels.

High net-worth Canadians — those with investable assets of $500,000 or more — are using mortgages as a deliberate investment strategy, according to a new Investors Group survey.

Disregarding the Retirement Deadline

Two thirds of those who have cash available to pay for their home in full still have a mortgage and about one quarter of them aren’t even planning on becoming mortgage-free before retirement.

What’s more, not even the looming inevitability of rates rising has them concerned about clinging to those mortgages.

When asked if they were worried about rates going up in the next year, only 8 per cent had any concern. Fourteen per cent were concerned about rates rising in the next three years and 18 per cent worried about what rates might look like in five.

“The notion that a mortgage is used only when funds aren’t available to pay cash for your home doesn’t ring true for many wealthy Canadians,” says Peter Veselinovich, vice president of banking and mortgage operations at Investors Group.

Will You Be Rewarded For The Risk?

Many within this group think they’ll be better off putting money aside in stocks or real estate than by throwing it at the mortgage — but that may not be as true as it’s been in the recent past.

Even with today’s relatively low rates, it’s tough to find an investment that’s going to yield a higher after-tax return than you’d get by paying your mortgage down.

Remember, it’s not sufficient to just get a higher return from stocks than it costs to carry that mortgage. The borrowing cost — or rather, the effective return that you get by repaying the mortgage and eliminating the associated interest cost — is guaranteed and risk-free.

Investing in stocks, on the other hand, is clearly risky —and, arguably, more so that it was a couple of years ago. Plus, you’ve got to do a lot better than you may think to come out ahead.

No investor would prudently pick a highly risky return just because it’s barely higher than a risk-free alternative. In practical terms, this means borrowers shouldn’t eschew pre-paying the mortgage and investing in stocks simply because equities are expected to earn a higher return.

If they’re going to be compensated for the actual risk they’re taking, they shouldn’t direct money towards stocks unless they expect to earn the mortgage interest rate plus something like a 5 per cent risk premium — and that’s not easy to do these days.

Related Topics

Home Ownership / Mortgage News / Mortgages

2 thoughts on “Payment Procrastination: Why Canadians Aren’t Worried About Their Mortgages

  1. why you guys are worry mongering?? Check the historical lending rates in the G8 world including japan germany and USA, UK. How do you think that canada can increase interest rate without compromising the economy?? Increasing interst rate will bring disaster in canadian economy when there is tons on money (flowing in and flown infrom various countries world wide where there is a political problem) siting in the banks?? Please do not be naive and spread scary news of interest rate hike!
    Having said that, it is always prudent to keep the existing mortgage payment in usual run: let people to enjoy vacations and to invest in other available areas. Thanks for allowing to comment.MN

  2. I agree with Gordon. My wife and I paid off our mortgage effective August 1. This allows us to focus more clearly on eliminating our remaining secured line of credit. We prefer to own our home outright, so that if there is another economic meltdown, we will have more leverage to move to another financial institution if need be. I’m old enough to remember when interest rates below 10% were said to be a remote possibility, and still young enough to get ready should the high-interest rate scenario return. Plus I’ve read David Trahair’s book Crushing Debt.

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