Spotlight On Mortgages: September 13, 2013

Spotlight on Mortgages

Buying a home and starting a family is a milestone long aspired to by young adults – but are today’s young people having to make a hard choice? Data from the new National Household Survey shows that almost half of households under the age of 24 are spending more than they can afford on their shelter costs – and it’s leaving them with little monetary resource for anything else.

The standard for shelter costs (any money put toward mortgage payments, rent, utilities and other fees) is 30 per cent of a household’s total income – a threshold put in place by the CMHC in 1986. While it may not be entirely surprising that the under-24 set is over their heads (lingering post secondary debt and a lagging job market take their toll), the survey found that in total, a quarter of all Canadian households are blowing the limit.

While the majority of overreaching households were renters (40.1 per cent), so are 18.5 per cent of homeowners – especially mortgage holders, who were found to exceed the 30 per cent mark by $688 each month. That’s a big bite out of income that could otherwise go toward retirement planning, savings or debt repayment.

Why So Many Cash Strapped Home Buyers?

The first time buyer segment has been hard hit by recent mortgage rules put in place to stem Canada’s ballooning household debt. OSFI, the  market regulator, implemented four rounds of amortization limitations between 2008 and 2012, with the most recent reducing home payment timelines to just 25 years for low ratio buyers. Previously, homeowners had up to 40 years to pay back their mortgages.

The Great Canadian Family Condo?

The NHS data also pinpointed the growing trend toward condos – now resided in by one in eight Canadian households. The lower financial barrier to ownership is a big draw for the average first time buyer, who’s hard pressed to afford a detached home without commuting far beyond city limits. In fact, 78 per cent of condo dwellers live in Canada’s 10 largest metropolises – 53.5 per cent in Toronto alone. Considering the price difference (condos go for an average of $338,854 compared to $513,246 for detached in the GTA, according to TREB), it’s no wonder the condo segment is a major contributor to Canadian ownership levels, which have now hit 69 per cent.

Is It About To Get Even Harder To Afford A Home?

It has been reported that OSFI is considering yet another set of changes for homebuyers as the market looks to be rebounding nicely from the last round. Household debt is still high – mortgage debt has risen to $879 billion, up 4.2 per cent from last year, and concerns persist that home prices are overvalued. Historically low fixed and variable mortgage rates have been a contributing cause, as buyers have taken advantage of cheap borrowing costs.

This time around, there’s some speculation that restrictions will target low-ratio borrowers: those who pay more than 20 per cent on their home’s down payment and are not required to be insured against default. Currently, this group still has access to 30-year amortizations.

It’s important to keep in mind that this still based purely on speculation; OSFI has yet to comment officially on the matter. Finance Minister Jim Flaherty, who has long championed cooling measures to stem household debt, also seems to have had a change of heart. In a news statement this week, he noted his satisfaction in the housing market’s performance, saying, “I tightened the rules on mortgage insurance four times in the past several years, and OSFI has also taken some action, the superintendent of financial institutions, and I’m comfortable with what I’ve seen.”

Week In Review

Long term fixed rates saw the most movement this week, as the 10-year rose by 10 basis points from last week’s 4.09 per cent. One-year fixed slid very moderately by a basis point, and both fixed and variable five-year terms are holding steady.

Related Topics

Mortgage News / Mortgages

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