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Home or health? That's a choice one in five Canadian homeowners have to make, as they struggle to keep a roof over their heads. And that number could soon rise as the costs of home ownership increase, experts say.
Mortgage rates are on the way up. But a sustained period of historic lows allowed many Canadians into the market who might not otherwise have been able to afford a home, with some taking on dangerously high debt.
When housing becomes unaffordable - consuming over 30% of owners’ pre-tax income - owners look for ways to reduce spending in other areas, which can have negative health effects, the Conference Board of Canada says.
“About one-fifth of Canadian households do not have the resources to afford both good-quality homes and other health-enhancing expenditures, such as nutritious food or access to recreational activities,” says Diana MacKay, the Conference Board’s director of education and health.
The board added that about 25% of Canadian households already rely on housing subsidies or experience periods of housing “unaffordability,” a figure it expects to increase.
Among those most likely to feel the effects of rising rates are new homebuyers who pushed their finances to the limit to get into a house. They may soon find it difficult to pay for their purchases, says University of Winnipeg professor Tom Carter, the Canada research chair in Urban Change and Adaptation.
“There’s a lot of people who didn’t have to put very much down,” Carter says. “Mortgage rate lending has been fairly flexible in recent years, but they still have very high mortgages – and when the rates go up, we are going to have more people with a serious affordability problem.”
In February, Finance Minister Jim Flaherty announced new mortgage qualification rules to discourage homeowners from taking out mortgages they might not be able to afford down the road, when rates return to more normal levels.
Under the new rules, borrowers will have to meet the standards for a five-year, fixed-rate mortgage even if the period they choose is shorter and the interest rate they pay is lower.
Ian Lee, MBA director at the Sprott School of Business at Carleton University in Ottawa, wanted Flaherty to go even further: he was calling for an increase to the down payment required to purchase a home - from five to 10%.
“Anybody that’s poor – meaning can’t afford it – they can’t get a mortgage anymore, so you just shut them out of the market.”
Lee sees a problem with the societal emphasis put on home ownership, which some people simply can’t afford.
“If you can’t afford the bills and you can’t afford the payment and you can’t afford the [property tax], then you don’t have the right to own a home,” he says.
He adds that while mortgage rate increases could make the debt loads for overextended owners unbearable, Canada is not likely to see a foreclosure crisis similar to the one U.S. consumers faced in the wake of the sub-prime mortgage crisis south of the border.
Carter says there could be more defaults on loans and more home foreclosures in the coming year, but adds most people will scrimp on other spending to pay off their mortgages or rents.
Queen’s University business professor Louis Gagnon says the rise in interest rates means borrowers should put themselves in risk-management mode.
“Interest rates have nowhere to go but up, which may have a big impact on mortgage payments when people renew,” Gagnon says. “The best way to prepare for the future is to pay our debt, not go further into it.”
Adrian Mastracci, a portfolio manager at KCM Wealth Management, says debt-burdened consumers should consider consolidation while they can still lock in to relatively low rates. Borrowers with mortgages at higher rates don’t need to wait until their loan matures to renegotiate if their loans have prepayment privileges.
He says consumers should aggressively pay down lines of credit now so their monthly interest costs don’t rise when rates do, while those with high credit card balances should transfer them to a lower-cost line of credit or mortgage.
