Canadians Managing Housing Debt Better Than Thought: CIBC

Canadians are taking advantage of record low interest rates to accelerate their mortgage payments, reducing the risk of an interest-rate shock, according to Canadian Imperial Bank of Commerce.

An estimated 30 percent to 40 percent of Canadian households are paying back their mortgages in a way that de facto shortens their amortization, according to Benjamin Tal, deputy chief economist at CIBC. As much as 50 percent are now estimated to have an amortization period of less than 20 years, according to a report released by Tal today.

“It appears that not only have many households resisted the temptation of low rates but, in fact, they used those rates to pay down debt at a rate not seen before,” Tal said in the note.

The accelerated payments come as Canadians’ debt loads approach a record high. Credit-market debt such as mortgages rose to 163.6 percent of income in the second quarter, close to a record 164.1 percent in the third quarter last year. Bank of Canada Governor Stephen Poloz said in September that the risks associated with this housing imbalance have not diminished.

Tal said there are other positives to the Canadian consumer debt profile. The number of personal bankruptcies has been on a downward trajectory over the past five years, while arrears rates in the mortgage market and in other consumer credit portfolios are at or near record lows.

While the picture may not be so rosy in the event of an interest-rate increase of 2 to 3 percentage points, the recent trajectory for the credit market suggests a reduced risk of an “abrupt and measurable rise in defaults” when rates eventually increase, he said.

“But it is not over yet,” Tal said in the note. “The Bank of Canada is determined to keep low rates for as long as possible—further testing the willpower of Canadians.”

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