Some startling reports on Canadian household debt, especially among older people, appear to show that many are getting in over their heads, but some lenders note that if the debt is residential mortgages, it may not be debt but equity.
Seniors Using Real Estate as Investment in Retirement
According to a study by TD Bank for example, older Canadians have been increasing their debt load at a faster rate than younger people. In particular, those over 65 are racking up debt at three times the average pace for all age groups.
However, as one Vancouver mortgage broker noted, older persons are often investing in real estate as a retirement hedge. And in Metro Vancouver -- where the typical house price has increased 29 per cent in five years and 8.8 per cent in the last 12 months, and the typical condo price is up 4.4 per cent from last year and 21.3 per cent in the past five years -- those taking out mortgage debt at todays low interest rates may be smarter than the herd.
Indeed, a closer look shows that a large part of the debt increase among older Canadians reflects investment in real estate. The trend toward real estate has been more prominent than average among the 65+ group, where average holdings have doubled since 2002, according to TD Bank.
"For those in or close to retirement, low returns on interest-bearing securities and sharp [stock market] losses in recent years have provided an added incentive to diversify into real estate," TD notes in its survey.
Younger Folks Paying Off Their Mortgages
A separate survey from Canada Mortgage and Housing Corp.(CMHC) also shows that most Canadians are smart about handling their mortgage loans.
"Survey findings indicate that 75 per cent of Canadian home buyers feel it is very important to pay off their mortgage as soon as possible. In fact, 39 per cent of recent buyers have their mortgage payment set higher than the minimum required. Further, since taking out their mortgage, 20 per cent of recent home buyers have already made a lump sum payment to their mortgage," CMHC noted.
Even Canada's largest mortgage lender, Royal Bank (RBC) does not seem too concerned about rising mortgage debt levels.
"Elevated consumer debt levels in Canada have created some risks for household balance sheets, if interest rates rise significantly or the economy suffers a shock to the labour market, housing market, or both," said David Onyett-Jeffries, an economist with RBC Economics. "We expect only modest interest rate increases ... resulting in the cost of servicing households' debt burden remaining manageable."
Finally, another major survey agrees that Canadians are handling their mortgage debt wisely. The Canadian Association of Accredited Mortgage Professionals' annual survey of the residential mortgage market found that "Many Canadians believe that other people have taken on too much debt or have bought homes for which they are unprepared. But, when responses about their own situations are aggregated, most believe that they have been responsible."
When asked how much of an increase on their mortgage payments respondents could afford, the average amount of wiggle room was $750. Only 8 per cent said up to $100 would be too much, with 68% able to fit $300 or more into their monthly budgets.
The report concluded that "... overall these responses suggest that prudence rules the land."
And when was the last time you even heard the word "prudence"?
