Written by Jim Adair

During the last couple of years, the average Canadian home buyer made a down payment of $119,000, about one-third of the value of their homes. Most have fixed-rate mortgages with five-year terms and an average interest rate of three per cent, according to a recent report by the Canadian Association of Accredited Mortgage Professionals (CAAMP).

Author Will Dunning says in the report, “Very low levels of interest rates mean that Canadians are paying less interest and have more money available that they can use to repay their mortgage principals. CAAMP’s surveys have found that Canadians are making significant efforts to repay their mortgages more rapidly than they have to.”

A Manulife Bank of Canada survey found that four in 10 homeowners made extra mortgage payments or increased the amount of their payment during the last year. It found that homeowners with mortgage debt paid down an average of $6,300 in the past year. The number of homeowners who reduced their debt is up from last year’s survey.

“These results are encouraging,” says Rick Lunny, president and CEO of Manulife Bank of Canada. “Effective debt-management is absolutely central to long-term financial health and clearly many Canadians are taking advantage of the low-rate environment to reduce their debt.”

High household debt remains a concern for everyone from the Bank of Canada to foreign observers of the country’s housing market. While home prices have levelled off in most parts of the country, soaring prices in Vancouver and Toronto have prompted calls for the government to take action to make homes more affordable.

For years there has been concern that once the rock-bottom mortgage interest rate begins to rise, many people who bought homes won’t be able to afford their payments.

“Our research finds that Canadians are well aware that interest rates can and will increase at some point and they have allowed themselves considerable room to absorb future rises in mortgage costs,” says Dunning. “Meanwhile, they continue to take advantage of low rates to pay off their mortgages as quickly as they can.”

The Manulife survey found more than a third of homeowners would have financial difficulty if their payments increased by 10 per cent, while another 15 per cent said they would not be able to afford any increase in their payment.

However, 80 per cent of homeowners indicated a willingness to cut back on their discretionary spending if it meant they could shrink their mortgages. Among the items they are willing to sacrifice are dining out, daily coffee/snacks, movies, concerts and sporting events. But only 20 per cent said they would be willing to cut back on their phone, Internet or cable TV services.

Both surveys say the biggest threat to homeowners is job loss.

The Manulife Bank of Canada survey says that if the primary income-earning homeowner lost their job, one in six would have problems making their regular mortgage payment in just one month, and 27 per cent would have difficulty after three months.

Dunning’s CAAMP report says, “It is possible that job losses could lead to more arrears and defaults. The greatest risks would be in the regions that produce oil and natural gas. In the remaining provinces, where economic outlooks are more favourable, mortgage difficulties are much less likely.”

During the last year, the Canadian Bankers Association says the rate of mortgage arrears has been stable at a rate of just under 0.3 per cent.

The June 2015 House Trends and Affordability report from RBC Economics says that excluding Vancouver and Toronto, “Generally speaking, housing affordability remains fairly neutral in Canada with limited signs of undue stress being exerted on home buyers. Both at the national level and in the majority of local markets, RBC’s affordability measures are still quite close to their long-term averages, thereby suggesting that current conditions are within historical norms.”

RBC and other forecasters believe that the Bank of Canada will start raising interest rates in the second quarter of 2016. “The effect on affordability of a rise in interest rates would be most visible in high-priced markets,” says RBC.

CAAMP says that by the end of 2015, total outstanding residential mortgage credit in Canada will be about $1.34 trillion, “and by the end of 2016, the figure may be very close to $1.4 trillion.”

Mortgage brokers want the government to resist the temptation to clamp down on lending. Dunning says they are concerned that if there’s an economic slowdown, leading to less housing activity and higher mortgage defaults, the government might tighten mortgage lending rules.

“Any reduction in the availability of mortgage credit would further dampen housing activity and aggravate the default issues,” he says. “Moreover, because housing has such an important role in the economy, this would add to the negative economic risks in Canada.”