Home equity wealth is enormous in Canada and currently sits in the range of $3 trillion. Homeownership can be considered a “forced saving’s plan”, according to Mortgage Professionals Canada’s Annual State of the Housing Market report released in December.
Mortgage payments are a blend of interest payment and repayment of principal. As interest rates have fallen, the share of the payment that goes to principal has increased sharply. At today’s rates, and assuming a 25-year amortization period, 50% of the first payment is principal repayment. A decade ago the share would have been 31%. This implies the following:
- Faster repayment of principal means increased equity.
- This may be the reason many consumers consider mortgages “good debt”.
- Most mortgage borrowers understand that the principal part of their payment, while a cost, goes to their bottom line and improves their financial situation.
- The “net cost” of homeownership (excluding principal repayment) is now very low in historic terms.
The report also found that in 2015, 36% of homeowners took actions to reduce their mortgage debt. While many homeowners think in terms of lump-sum payments, which are a great option, there are other ways to save money and pay down that debt. It only takes small changes for you to become mortgage free, save thousands of dollars in interest and increase your equity.
Consider the following actions:
- Refinancing for a lower interest rate
- Renegotiating for a lower interest rate
- Switching to accelerated bi-weekly payments
- Increasing amount of regular payments
- Lump-sum payments
According to the report about 950,000 mortgage holders voluntarily increased their regular payments during the past year. The average amount of increase was about $340 per month, for a total of almost $4 billion per year. In addition, voluntary increases that were made in prior years continue to contribute to accelerated repayment of mortgages. Increasing your payment by just $20 a month can have a positive impact simply because the extra money is applied directly against the mortgage principal. This decreases the amount of interest you will pay over the life of the loan.
Also in 2015, seven per cent of mortgage holders (about 400,000) increased the frequency of their payments. Just over one million made lump sum payments during the past year. The average amount was about $15,300, for combined repayment estimated at $15.5 billion.
Other highlights from the report include:
- About 660,000 households lived in homes that they purchased during the past year (newly-constructed or resale). The average price is $408,800, for a total value of $270 billion.
- Among these recent homebuyers, there had been an estimated total of $35 billion in mortgages on existing homes that they sold (which would have been discharged or transferred at the time). The combination of $188 billion in financing on purchased homes minus $35 billion on prior dwellings means that home purchases in 2015 have resulted in a net credit growth of $153 billion.
- About 100,000 Canadian homeowners fully repaid their mortgages during 2015 (up to the date of the fall survey). A further 40,000 expect to fully repay their mortgage before the end of the year. In combination, about 140,000 mortgages will have been fully repaid during the year.
The freedom that being completely debt-free brings is a dream for many Canadians. If you’re unsure of what your next step should be, talk to a mortgage broker. Together you can review your mortgage, look at your financial picture and devise a mortgage-reduction plan that works for you.