Historical article note: This article was originally published on 2018-09-04. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
There are approximately 14 million privately owned houses in Canada, with a population of 36 million, and an average of 2.6 people living in one house. Among these properties, 6 million have mortgage loans, and the owners of 8 million have paid off their mortgages. 57.2% of the houses have no loans! This number may surprise you. What’s even more surprising: the average mortgage balance of households with mortgages is only 203,000. If readers find this unbelievable, I can tell you that if your mortgage loan is higher than this average, it means you arrived late, or bought a house later than others; if your mortgage balance is higher than twice this average balance, congratulations, you must be living in Toronto or Vancouver. The average house price in Canada is about 500,000. The average loan balance of Canadians with loans is about 40% of the house price, and homeowners own 60% of the house rights. Compare and calculate, what proportion of house rights do you own?
There is often such "news" in the Chinese community. The general meaning is that if interest rates are raised by X%, Canadians will go bankrupt and the real estate market will collapse. . . . The authors of such news not only lack common sense about debt, but also lack a basic understanding of the living conditions of Canadians. On average, all Canadian homeowners own 70% of their houses and only 30% have loans. In this case, how much will housing prices drop before the homeowners will not even want the house and refuse to repay the loan? Paying back debts is not a matter of course, but a kind of instinct. I recently read a "news advertisement", that is, it looks like an explanatory article at the beginning, and ends with an advertisement, which can also be called a soft article. The main idea of the article is: Canadians are facing an interest rate hike. If you add X%, you will have to increase your monthly payment by several thousand dollars. The conclusion is: come to us for stock investment. I don't understand the logic at all, because I think that in the interest rate hike channel, people with debt should give priority to accelerating the repayment of their home mortgage loans in advance, and there is no rush to repay investment housing debts in advance. The reasons are: 1. The interest expense of the self-housing loan is not tax-deductible, and it is paid entirely with after-tax income, so the smaller the balance of the self-housing loan, the better; 2. If you do not accelerate the repayment of the self-housing loan, but invest in stocks, the income is taxable income, and the interest saved by accelerating the repayment of the self-housing loan is not taxable; 3. The tenant pays the loan for the investment house, and the interest is tax deductible, so there is no need to rush to pay. My personal suggestion is that readers whose home debt exceeds 203,000 should pay off their mortgages in advance.
Debt has the characteristics of concentrated risk, and people with more bad debts are more financially vulnerable. Bad debt, including all debts on your home and all consumer loans, including credit cards and car loans, is characterized by debts that are repaid with after-tax income. Good debt refers to debt that has someone to help repay it, debt that is repaid with pre-tax income, such as a loan for an investment house. People with debt are most afraid of financial changes, such as unemployment, disability, unexpected death of the borrower and other misfortunes. Therefore, Canadian government agencies attach great importance to the debt issue and constantly release official information to correct the situation. CMHC released the latest Canadian Household Debt Report in July 2018. The important content is excerpted below. You can use it as a basis for comparison to see whether your family's debt is higher than the average level and recommend taking corresponding actions.
The actual situation of Canadians' debt is far different from what the newspapers say. I will give you four questions to see how many readers can answer correctly. Please choose whether the following four statements are "true" or "wrong":
1) People with mortgages are more likely to go bankrupt than people without mortgages;
2) Borrowers with a loan balance of more than RMB 800,000 are more likely to default than borrowers with a loan balance of less than RMB 200,000;
3) Borrowers over 65 years old have lower default rates than borrowers under 34 years old;
4) Due to rising interest rates, the loan default rate in the fourth quarter of 2017 was higher than that in the same period in 2016.
The above four statements are all wrong. Households with mortgages generally have higher financial capabilities than those without mortgages and have a lower rate of bankruptcy because they have passed the bank's stress test. People with larger loan balances have higher incomes and generally better credit histories and are therefore less likely to default. Borrowers over the age of 65 have the largest proportion of defaults, because many elderly people do not understand the government's pension system and do not pay off their mortgages before retirement. Their income plummets after retirement, leading to loan defaults. In the fourth quarter of 2017, the mortgage default rate continued to decline, with the default rate reaching 0.29%, reaching the lowest level in 10 years. Judging from the above situation, the mortgage default rate is directly related to the employment rate and income. The lower the unemployment rate, the lower the default rate, and the higher the income, the lower the default rate. Mortgage default rates are not directly related to interest rates. In the 10 years from 2008 to 2018, the highest mortgage default rate was in 2010, when the loan default rate was 0.43%. At that time, unemployment was high, interest rates were low, and the average interest rate was below 3%. In 2007, Canadian mortgage loan interest rates averaged 6.3%, while the default rate was only 0.25%. Some tabloids, especially those with advertising nature in Chinese communities, do not hesitate to confuse right and wrong for their own gain, and forcefully link interest rates and loan default rates. If you answered all four questions above wrong, it means these guys who write soft articles have succeeded. Judging from the above comprehensive situation, Canadians’ mortgage risk is very low. For comparison, let's look at the situation in the United States. In 2010, the loan default rate in the United States was also the highest in history, 8.99%. At that time, the Canadian mortgage default rate was 0.43%, a difference of 21 times. The current mortgage default rate in the United States is 3.5%, and that in Canada is 0.29%, a difference of 12 times. The argument that there is a housing bubble in Canada and that the real estate market is about to collapse is simply untenable. Three out of 1,000 borrowing families defaulted on their mortgages, which will not affect the other 997 families anyway.
Home loan risks vary for every borrower. According to CMHC data, the single loan amount of new borrowers applying for mortgage loans in recent years has increased year by year. When lending, the proportion of households with a new single loan amount of more than 400,000 yuan is increasing, and the proportion of new loans with a single amount of less than 300,000 yuan is decreasing. Among them, the proportion of new loans with a single amount of more than 600,000 yuan is rising the fastest. The average monthly payment for a new mortgage is 1,400 yuan, while the average monthly payment for an old mortgage is only 1,200 yuan. Not only do new mortgage borrowers have large loan amounts, but they also have heavy monthly payment burdens. New homeowners cannot take the pressure on their mortgages lightly.
Families with mortgages are always at risk until the mortgage is paid off. Howard Marks corrected people's definition of "risk" in his book "The Most Important Thing in Investing". Marks believed that risk is not volatility, but total loss of principal. Ten years ago, during the U.S. subprime mortgage crisis, homeowners suffered a total loss of down payments and were forced to sell their houses. The scene should not be far away from us. "Households with mortgages are always at risk" means that homeowners are always faced with the possibility of losing their down payment before paying off their mortgage in full. For example: when house prices fall, you just lose your job; when you rent out the basement of your home and a fire is caused by the tenant, the insurance company will not pay compensation; when house prices fall, one spouse dies unexpectedly and does not buy life insurance; when house prices fall, one or both spouses are accidentally disabled and do not buy disability insurance; these unexpected situations may cause the mortgage loan to be cut off, the bank to repossess the property, and the homeowner to lose all or part of the down payment. Look from these examples: Mortgage is a tool that concentrates risk. Once you have a mortgage, your finances become very fragile and cannot withstand the double blow of personal accidents and falling house prices. Think carefully about whether it’s time to accelerate your mortgage payments early. If your ability does not allow it, you can also consider increasing the insurance coverage of various insurances. For risks that have not been considered before, you should consider buying insurance to diversify the risks.