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Canadians playing it safe with mortgages


Source: Steve Ladurantaye, The Globe and Mail columnist, Jan. 14th

Canadian home buyers are being cautious when taking out new mortgages, a report suggests.

The Canadian Association of Accredited Mortgage Professionals examined 40,000 loans issued in 2009, and found that 86 per cent of new mortgages issued were fixed-term. These are considered less risky than variable-rate terms, because the homeowner is locked in at one rate for a set amount of time, typically five years.

“The vast majority of Canadian mortgage borrowers are not taking on undue risks,” said Jim Murphy, the association’s president. “They have factored rising interest rates in to their mortgage decisions.”

While variable rate loans have been available as low as 2.25 per cent (compared to 4 per cent for fixed rate mortgages), there is concern that interest rates will rise higher and make it difficult for many on variable plans to meet their rising costs.

But among the majority of borrowers who took out fixed terms, 70 per cent took terms of five years or longer. The majority of borrowers also took out mortgages below the maximum they’d be allowed under the gross debt service ratio – a figure generated by the bank that considers how much debt someone can reasonably take on.

Mr. Murphy said the longer terms and borrowing less than the maximum goes contrary to the perception that Canadians are taking on too much debt to take advantage of low interest rates.

But there are some new buyers who could find themselves in trouble, according to the survey. About 4,000 households appeared to take on maximum debt along with short-term rates, said the association’s chief economist Will Dunning.

“Each year, about 2.5 to 3 per cent of Canadian households make a first-time home purchase,” he said. “Our data shows that only a small percentage of them are pushing-the-envelope – about 4,000 households which amounts to a tiny fraction of the 13.25 million homeowners in Canada. For those who borrowed in prior years, risks are even lower.”

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