• Canadians paying down debt quickly in low-rate environment

    CIBC economist says mortgage amortizations are getting shorter, meaning less risk from rising rates

    Home prices may be rising, but Canadians are taking advantage of low rates to pay down their mortgage principal faster, says CIBC’s Benjamin Tal. (Nathan Denette/Canadian Press)

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    Paying down the mortgage

    Paying down the mortgage 6:52

    Paying down the mortgage
    • Average house price rises almost 6% to $408,795 contrary to all the hype about consumer debt levels, Canadians are paying off their debts, especially their mortgages, at a faster rate than the Bank of Canada estimates, says CIBC economist  Benjamin Tal.

    Canadians are actually very responsible in the face of tempting low interest rates, Tal said in an interview with CBC`s The Exchange with Amanda Lang.

    “When interest rates are low, you can do two things. One is accumulate more debt or start accelerating your payments and reduce your principal — that`s exactly what we are seeing,” he said.

    Tal says Canadians appear to be taking advantage of low rates to pay off the principal on their mortgages.

    For many, that means a shorter amortization period and more wiggle room to handle any financial shocks.

    “What it means is you are reducing amortization from 25 years to 20 years — that`s significant,” he said.

    So there is very little risk of debt default in Canadian households if rates rise, Tal said.

    “If interest rates start rising, people could extend amortization and keep payments the same, so you will not see a reduction in consumer spending and the economy will not suffer,” he said.

    No rate hike expected

    Tal does not expect rates to rise any time soon, with so many indications that the world economy has slowed and the recent turmoil on markets. He predicts the U.S. Federal Reserve will go slow on raising rates.

    There may even be lower mortgage rates in the near future, because bond yields have fallen so low.

    Investors flooded into the U.S. Treasury market today in response to plunging stock markets , causing the yield on the benchmark 10-year Treasury note to fall below two per cent for the first time in more than a year.

    The yield on the benchmark 10-year Treasury note fell from 2.20 per cent Tuesday to as low as 1.91 per cent Wednesday, a decline of 29 basis points. Since banks base mortgage rates on long-term bond yields, that could mean a cut in mortgage rates in the near future.

    Tal said most people signing new mortgages in Canada have substantial capital to put toward their purchase, in part as a result of high housing prices.

    “First time homebuyers were basically priced out of the market three or four years ago. When you reduce amortization from 40 years to 25 years, you basically price out a significant segment of the first-time home buyer market,” he said.

    Rules were changed two years ago to end very long amortization terms in one of former finance minister Jim Flaherty`s attempts

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