Paying your debt at these rates is a great deal, so why is no one listening?
Garry Marr
Other
Low interest rates should have been a huge bonus for Canadians, a chance to pay down the mortgage faster, unload high interest debt and be in a good position if rates rise.
But there are signs that the opposite has happened, people are more in debt than ever and new research suggests Canadians have actually added to the timeline for finally paying off their mortgage.
“Interest rates have almost been a curse for the economy,” says David Madani, an economist with Capital Economics who continues to say a housing a correction and a rise in interest rates are long overdue.
Canadians seem to have become addicted to the idea that these low rates will last forever. It might be the reason household debt remains so high. The percentage of household debt to disposable income reached a record 164.1% in the third quarter of 2013 and dropped only marginally during the winter months when there is typically less home-purchasing activity.
t’s been 45 months since the Bank of Canada changed its overnight lending rate. That rate is tied to prime which most variable mortgage loans are priced off of, making it easy to see why a consumer with a floating rate is having trouble believing interest costs will be rising anytime soon. Some consumers are borrowing money at close to 2% today.
But economists still insist interest rates are going up eventually – both short-term and long-term rates. Today’s record-low interest rates might be the last opportunity to pay down your debt for good.
“We’ve seen the little boy cry wolf so many times, I’m not sure anybody is listening anymore,” says Doug Porter, chief economist with Bank of Montreal. “We all know that wolf eventually does arrive at some point.”
Financial institutions seem worried about that debt with the Canadian Imperial Bank of Commerce using the state of the market to advise Canadians this week that they should be using the present low-rate environment to make a higher payment and knock down that principal. Rates are going to go up anyway, just imagine they already have and boost your payment according – more money will go to principal with less to be paid at higher interest rates later.
But Canadians don’t seem to be listening. The CIBC poll done from May 21-22 found that among the 1,509 respondents with mortgages, the average expected age to have a mortgage finally paid was 58. That was up from 57, when the poll was done a year earlier.
“Interest rates have been low for so long and there has been a lot of discussion and predictions about them rising,” says Barry Gollom, vice-president of secured lending and product policy at CIBC. “People are very focused on the mortgage payment they are making and can they manage it.”
But a few steps to put your interest rate savings to work for you could have an exponential benefit later. And, if you have been ignoring advice to get to work on your debt, it’s not too late to reap some of those benefits.
“I think it’s so hard to predict where rates are going,” says Mr. Gollom, adding it’s a good time to discuss what you’ll do if rates rise. “It’s incumbent on consumers to consider that as part of their longer term planning.”
Most mortgages have rules that allow you to prepay 20% of the loan each year or even increase your monthly payments by up to 20%. Think of a $250,000 mortgage at 4.99% with a 25-year amortization and monthly payments of $1,453. Just topping your monthly payment up to an even $1,600 per month would reduce the length of your loan by four years and save you $34,362 in interest charges.
Not everyone is seeing it quite that way. The CIBC poll found only 55% of consumers are taking one or more actions to pay down their mortgage faster. That’s down from 68% a year ago.
Paula Roberts, a Toronto mortgage broker, said five-year closed insured mortgages are now as low as 2.89% and that’s making it tougher than ever to convince clients to pay down debt.
“I think when rates move [up] they’ll move quickly,” says Ms. Roberts. “People should be paying off their mortgages faster, if they don’t have other debts. You shouldn’t accelerate payments if you have $20,000 in credit card debt at 18%. It makes sense to be really aggressive and pay off debt, just pay higher debt first.”
© 2014 National Post