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Prudence Paying Off for Canadian Mortgage Borrowers

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					Prudence Paying Off for
    Canadian Mortgage
           Borrowers
                                May 2010




                            Prepared for:
                       Canadian Association of
            Accredited Mortgage Professionals


                                         By:
                               Will Dunning
                      CAAMP Chief Economist
 Table of Contents
                                                                                        Page
1.0   Introduction and Summary                                                            3
      Consumers’ Expectations About Housing Markets                                       3
      Profile of Mortgage Holders                                                         6
      Rising Interest Rates Will Bring Challenges                                         8
      Outlook for the Housing and Mortgage Markets                                       10
      About CAAMP                                                                        11
      About the Author                                                                   11
      About Maritz                                                                       11
      Disclaimer                                                                         11
2.0   Consumers’ Expectations About Housing Markets                                      12
      “Is Now a Good Time or a Bad Time to Buy a New Home in Your Community?”            12
      “How Likely are You to Purchase a New Property in the Next Year?”                  13
      “To What Extent Do You Think Housing Prices in Your Community Will Go Up or
                                                                                         14
       Down in the Next Year?”
      “To What Extent Do You Think Mortgage Rates Will Change in the Next Year?”         15
3.0   Profile of Mortgage Holders                                                        16
      Dimensions of the Mortgage Market                                                  16
      Recent Mortgage Activity                                                           16
      Fixed Rate Versus Variable Rate Mortgages                                          17
      Mortgage Terms                                                                     18
      Locking-in Mortgage Rates                                                          21
      Mortgage Amortization Periods                                                      21
      Types of Mortgage Professionals Consulted                                          22
      Interest Rates                                                                     23
      Mortgage Rate Discounting                                                          25
      Housing Equity                                                                     26
      Equity Take-out                                                                    28
      Payment Increases and Lump Sum Payments                                            29
      Missing Mortgage Payments                                                          30
      The Role of Rental Income                                                          32
4.0   Rising Interest Rates Will Bring Challenges                                        34
      The Survey Shows Vulnerabilities                                                   34
      Three Caveats                                                                      35
      Earlier Findings                                                                   37
      Conclusions                                                                        37
5.0   Outlook for the Housing and Mortgage Markets                                       38
      The Economic Background                                                            38
      Housing Market Impacts                                                             38
      Housing Market Forecasts                                                           40
      Implications for Mortgage Lending                                                  41




 Canadian Association of Accredited Mortgage Professionals                          May 2010
 “Prudence Paying Off for Canadian Mortgage Borrowers”                                Page 1
                                        List of Tables
 Table #     Contents                                                                              Page
             Average Consumers’ Ratings by Region for “Is Now a Good Time or a Bad Time to
 Table 1-1                                                                                          4
             Buy a New Home in Your Community?”
             Average Consumers’ Ratings by Region for “To What Extent Do You Think Housing
 Table 1-2                                                                                          4
             Prices in Your Community Will Go Up or Down in the Next Year?”
             Consumers’ Responses by Region for “How Likely Are You to Purchase a New
 Table 1-3                                                                                          5
             Property in the Next Year?”
             Consumers’ Ratings for “To What Extent Do You Think Mortgage Rates Will Change in
 Table 1-4                                                                                          5
             the Next Year?”
             Consumers’ Ratings for “Is Now a Good Time or a Bad Time to Buy a New Home in
 Table 2-1                                                                                          12
             Your Community?”
             Consumers’ Ratings for “How Likely Are You to Purchase a New Property in the Next
 Table 2-2                                                                                          13
             Year?”
             Consumers’ Ratings for “To What Extent Do You Think Housing Prices in Your
 Table 2-3                                                                                          14
             Community Will Go Up or Down in the Next Year?”
             Consumers’ Ratings for “To What Extent Do You Think Mortgage Rates Will Change in
 Table 2-4                                                                                          15
             the Next Year?”
 Table 3-1   Percentages of Mortgages by Type, By Age Group                                         17
             Percentages of Mortgages by Type, For Mortgages Originated During the Past 12
 Table 3-2                                                                                          18
             Months, By Age Group
             Percentages of Mortgages by Type, For Mortgages Renewed, Renegotiated, or
 Table 3-3                                                                                          18
             Transferred During the Past 12 Months, By Period of Property Purchase
 Table 3-4   Percentages of Mortgages by Length of Term, By Age Group                               19
             Percentages of Mortgages by Length of Term, By Age Group For Mortgages
 Table 3-5                                                                                          19
             Transacted During the Past 12 Months
             Percentages of Mortgages by Type of Mortgage and Length of Term, By Age Group,
 Table 3-6                                                                                          20
             For Mortgages Originated During the Past 12 Months
             Percentages of Mortgages by Type of Mortgage and Length of Term, For First-Time
 Table 3-7                                                                                          20
             Home Buyers, Mortgages Originated During the Past 12 Months
             Percentages of Mortgages by Length of Original Amortization Period, By Activity
 Table 3-8                                                                                          22
             During Last 12 Months
Table 3-9    Consumers’ Use of Mortgage Professionals During the Past 12 Months                     23
Table 3-10   Consumers’ Use of Mortgage Professionals During the Past 12 Months, By Region          23
Table 3-11   Average Mortgage Interest Rates by Mortgage Type and Time Since Initiation             24
             Changes in Mortgage Interest Rates for Mortgages Renewed During the Past 12
Table 3-12                                                                                          24
             months
Table 3-13   Calculation of Home Owner Equity in Canada, as of Spring 2010                          26
Table 3-14   Equity Positions of Current Mortgage Holders                                           27
Table 3-15   Consumers’ Comfort Levels With Their Current Equity Positions                          27
Table 3-16   Equity Take-Out, by Loan-to-Value Ratios                                               28
             Shares of Mortgage Holders Who Made Extra Payments During the Past 12 Months,
Table 3-17                                                                                          29
             By Year Property was Purchased
             Shares of Mortgage Holders Who Made Extra Payments During the Past 12 Months,
Table 3-18                                                                                          30
             by Length of Original Amortization Period
             Shares of Mortgage Holders Who Have Missed Mortgage Payments, By Year Property
Table 3-19                                                                                          30
             was Purchased
             Shares of Mortgage Holders Who Have Missed Mortgage Payments, By Original
Table 3-20                                                                                          31
             Amortization Period
             Shares of Mortgage Holders Who Have a Rental Unit in their Primary Residence, By
Table 3-21                                                                                          32
             Year Property was Purchased
             Shares of Mortgage Holders Who Have a Rental Unit in their Primary Residence, By
Table 3-22                                                                                          33
             Region
             Anticipated Impacts on Mortgage Holders of 5.25% Interest Rates, By Year Property
 Table 4-1                                                                                          35
             was Purchased
 Table 4-2   Housing Equity for Mortgage Holders, by Anticipated Impacts of 5.25% Interest Rates    36




Canadian Association of Accredited Mortgage Professionals                                 May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                                       Page 2
1.0    Introduction and Summary

The Canadian economy has undergone very rapid transitions during the past year and a
half: after a decade of considerable strength, a sharp recession started in the fall of
2008. More recently, there are clear signs that a solid recovery is underway. Housing is
one of the most reactive sectors of the economy and correspondingly housing markets
across Canada have transitioned from boom to bust to boom.

Mortgage consumers and mortgage professionals have definitely not been immune to
the rapid changes in hopes and fears.

This report has been prepared for the Canadian Association of Accredited Mortgage
Professionals (“CAAMP”) by Will Dunning, Chief Economist of CAAMP. It provides an
overview of the evolving state of the residential mortgage market in Canada. Major
sections of this report are:

•   Introduction and Summary
•   Consumers’ Expectations About Housing Markets
•   Profile of Mortgage Holders
•   Rising Interest Rates Will Bring Challenges
•   Outlook for the Housing and Mortgage Markets

Data used in this report was obtained from various sources, including an online survey of
3,000 Canadians. A large share of the sample (almost 1,800 Canadians) were home
owners with mortgages and the remainder were renters, home owners without
mortgages, or others who live with their families and are not responsible for mortgage
payments or rents. The survey was conducted by Maritz (a national public opinion and
market research firm) for CAAMP, during April 2010.


Consumers’ Expectations About Housing Markets

Consumers were asked several questions concerning their attitudes and expectations
about their local housing markets, and were asked to provide their answers on a 10-
point scale, where 1 is a very negative response and 10 is a very positive response.


Local Housing Market Conditions

When asked “is now a good time or a bad time to buy a new home in your community?”
responses softened in the spring 2010 survey. The average score given this spring was
6.32 out of 10, slightly lower than the record level seen last fall, but higher than was
seen in the first five times this question was asked. A high percentage of consumers
believe that this is a good time to buy a home. The positive responses about market
conditions are no doubt influenced by the low interest rates and favourable housing
affordability. The slight reduction in the scores given may be due to the frenzied market
conditions in many areas, which have given sellers a negotiating advantage over buyers
in many communities.

Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                            Page 3
    As can be seen in Table 1-1, attitudes on this question are positive in every region of
    Canada.

                                              Table 1-1
               Average Consumers’ Ratings by Region for “Is Now a Good Time or a
                         Bad Time to Buy a New Home in Your Community?”
                                                                                    British
Survey Date Atlantic Quebec Ontario Manitoba Saskatchewan Alberta                             Canada
                                                                                  Columbia
Spring 2010     6.23       6.25    6.57        6.11            5.72       6.15       6.13      6.32
Fall 2009       6.53       6.27    6.82        6.23            6.05       6.64       6.58      6.56
Spring 2009     6.30       5.48    6.96        5.88            5.67       6.93       6.97      6.46
Fall 2008       5.59       5.31    5.84        5.25            5.04       5.66       5.55      5.58
Spring 2008     6.25       5.64    5.90        4.97            3.93       4.75       4.91      5.52
Fall 2007       6.19       5.91    6.02        5.39            5.47       4.31       4.86      5.62
Spring 2007     5.85       3.95    5.85        5.29            6.25       4.05       5.09      5.10
Fall 2006       5.98       5.63    5.92        4.81            6.10       3.20       4.59      5.36
Source: Pollara survey for CIMBL, Fall 2006; Maritz survey for CAAMP, 2007 to 2010.


    Home Buying Intentions

    While consumers’ attitudes about the state of the housing market in their communities
    are quite positive, home buying intentions have not followed. A question that was first
    asked in the fall of 2008 asked consumers how likely they were to buy a home, on a 10-
    point scale. In each of the four surveys to date, less than 5% of consumers indicated
    that they were very likely to buy (giving ratings of 9 or 10 out of 10). The current low
    score of just 3.4% suggests that home buying activity may slow during the remainder of
    this year.

                                                Table 1-2
                            Consumers’ Responses by Region for “How Likely
                          Are You to Purchase a New Property in the Next Year?”
                                                                                    British
Survey Date    Atlantic    Quebec    Ontario   Manitoba   Saskatchewan   Alberta              Canada
                                                                                   Columbia
Average Score
Spring 2010      2.63      2.96     2.69       2.77           3.07        3.25       2.95      2.86
Fall 2009        2.48      2.51     2.66       2.64           3.02        2.59       2.81      2.63
Spring 2009      2.92      2.70     2.81       2.71           2.88        3.04       3.15      2.86
Fall 2008        2.64      2.53     2.78       2.28           2.58        3.27       2.90      2.76
% Giving Score of 9 or 10 out of 10
Spring 2010     4.2%       4.2%     2.5%       2.1%           2.1%        4.3%      3.5%       3.4%
Fall 2009       1.3%       3.1%     3.8%       4.3%           4.7%        2.9%      1.7%       3.2%
Spring 2009     7.9%       5.5%     3.7%       5.5%           2.2%        4.5%      3.4%       4.5%
Fall 2008       3.2%       4.3%     4.9%       2.3%           3.4%        6.4%      4.7%       4.6%
Source: Maritz survey for CAAMP, Fall 2008 to Spring 2010.




    Canadian Association of Accredited Mortgage Professionals                          May 2010
    “Prudence Paying Off for Canadian Mortgage Borrowers”                                Page 4
    Expectations about House Prices

    Expectations about house prices were weak in the fall of 2008 and spring of 2009, but
    have become considerably more optimistic. When asked “to what extent do you think
    housing prices in your community will go up or down in the next year?” just 7%
    expressed negative opinions (giving scores of 1 to 4 out of 10) this time. Almost one-
    half 49% expect prices to rise to varying degrees (ratings of 7 to 10) and 44% gave
    neutral answers (5 or 6 out of 10). The average rating of 6.46 is well above the midpoint
    of 5.5 on the 1-to-10 scale, and is the highest recorded in the eight times this question
    has been asked. Canadians expect that house values will continue to increase rapidly.

    As is shown in the table below, expectations about house prices are currently very
    similar across the country. In prior surveys, there was much more variation.

                                              Table 1-3
            Average Consumers’ Ratings by Region for “To What Extent Do You Think
            Housing Prices in Your Community Will Go Up or Down in the Next Year?”
                                                                                    British
Survey Date Atlantic Quebec Ontario Manitoba Saskatchewan Alberta                             Canada
                                                                                  Columbia
Spring 2010     6.24       6.51    6.51        6.45            6.46       6.46       6.38      6.46
Fall 2009       6.08       6.14    6.30        6.22            6.19       6.24       6.44      6.25
Spring 2009     5.34       5.34    5.15        5.49            5.86       5.27       5.09      5.27
Fall 2008       5.63       5.56    5.11        5.33            5.35       5.00       4.77      5.21
Spring 2008     6.26       6.22    5.96        6.64            6.98       5.47       6.35      6.10
Fall 2007       5.85       5.80    6.12        6.11            6.17       5.47       6.26      5.97
Spring 2007     5.96       6.28    6.22        5.86            6.61       6.70       6.42      6.29
Fall 2006       6.04       6.08    6.00        6.45            6.54       6.65       5.85      6.10
Source: Pollara survey for CIMBL, Fall 2006; Maritz survey for CAAMP, 2007 to 2010.


    Expectations About Mortgage Interest Rates

    CAAMP’s surveys have usually found that Canadian’s expectations about mortgage
    interest rates have been neutral. In the spring of 2010, however, a majority of
    Canadians indicate that they expect rates to rise in the coming year.

                                             Table 1-4
                 Consumers’ Ratings for “To What Extent Do You Think Mortgage
                                Rates Will Change in the Next Year?”
                                                       % Giving Rating
                         Rating
                                              Spring 2009           Spring 2010
                Fall
                                                  24%                   2%
                (Rating 1-4)
                Neutral
                                                  53%                   27%
                (Rating 5-6)
                Increase
                                                  23%                   70%
                (Rating 7-10)
                Total                            100%                  100%
                Average Rating                    5.49                  7.01
                Source: Maritz survey for CAAMP, Spring 2009 and Spring 2010.

    Canadian Association of Accredited Mortgage Professionals                         May 2010
    “Prudence Paying Off for Canadian Mortgage Borrowers”                               Page 5
Profile of Mortgage Holders

There are currently about 9.3 million home owners in Canada, of whom about 5.55
million have mortgages.

About one-quarter (24%) of home owners had some form of mortgaging activity during
the past 12 months: taking out a new mortgage on a home that was newly purchased or
which previously did not have a mortgage (7%), renewing, refinancing or transferring an
existing mortgage (17%), or paying off an existing mortgage (3%)1. The remainder (76%
of home owners) did not have any mortgaging activity during the year.

The average outstanding principal is $138,000. Based on the survey findings, it is
estimated that outstanding mortgage principals on primary residences total $770 billion.
Mortgages that were originated during the past year have a current total principal of
$127 billion; mortgages renewed, refinanced, or transferred have a total principal of
$180 billion; and for mortgage holders who were inactive during the year the current total
principal is $494 billion2.


Home Equity

The CAAMP study asked questions that generated estimates of home owners’ equity.

•   Among home owners who have mortgages, the average amount of equity is
    $159,000, representing 53% of the average value of their homes ($297,000).
•   For owners without mortgages equity is equal to the average home value ($317,000).
•   The total value of owner-occupied housing in Canada is estimated at $2.94 trillion.
    Mortgages on these homes total $770 billion, leaving $2.06 trillion in home owners’
    equity. This equity is equal to 70% of the total value of the housing.


Equity Take-Out

About 11% of mortgage borrowers took equity out of their home in the past year. The
average amount is estimated at $33,500. These results imply that the total amount of
equity take-out during the past year has been $20 billion, a substantial reduction
compared to the $34 billion estimate found in the spring 2009 survey. The reduction is
the consequence of the recession, which resulted in increased caution on the part of
both lenders and borrowers.



1
  In prior surveys, these shares were expressed as percentages of home owners with mortgages. The
expansion of the analysis to include all home owners (with or without mortgages) permits the inclusion of
home owners who have repaid their mortgages during the past year.
Since a household may have more than one mortgage activity during the year (for example, renewing and
then paying off a mortgage), the total of actions (27%) exceeds the share of households that had activity
(24%).
2
  Since some mortgages fall into more than one of these categories, the total of the categories exceeds the
estimated total principal of $770 billion.
Canadian Association of Accredited Mortgage Professionals                                       May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                                             Page 6
The most common uses for the funds from equity take-out are debt consolidation and
repayment. This accounts for about 42% of the total take-out, or about $8.4 billion. This
part of the total equity take-out would result in corresponding reductions for other forms
of consumer debt.


Mortgage Types, Terms, and Amortization Periods

Among mortgages that have been transacted during the past year, 65% have fixed
rates, 29% have variable or adjustable rates, and 6% are combination mortgages.

Most mortgages have long terms: among those transacted in the past year, 70% have
terms of five years or longer, just 9% have short terms of two years or less, and 21%
have terms of three or four years.

During recent years, mortgages with longer mortgage amortization periods have become
increasingly popular, but the share seems to have stabilized. For mortgages originated
during the past year, 64% had amortization periods of 25 years or less and 36% had
extended amortization periods.


Interest Rates

Looking at interest rates, the CAAMP/Maritz data indicates that:

•   The average mortgage interest rate for home owners’ mortgages is 4.09%, a
    reduction from 4.83% in the spring 2009 survey. For mortgages transacted during
    the past six months, the average rate is 3.63%.
•   Looking further, at borrowers who have renewed or refinanced a mortgage during the
    past year, the average interest rate is now lower (by 1.0 percentage point) than the
    rates prior to renewal. Among borrowers who renewed, 74% (about 1 million
    households) saw their interest rate fall, 20% (less than 300,000) saw increases, and
    6% had no change. For borrowers who saw their interest rates increase at renewal,
    the increases were minor for most. It is estimated that about 100,000 of these
    borrowers had their rates increase by more than 1 percentage point. This amounts
    to less than 2% of the 5.55 million Canadian home owners who have mortgages.
•   The survey also sheds light on the extent of mortgage rate discounting in Canada.
    Borrowers who have taken five year, fixed rate mortgages during the past year have
    an average mortgage interest rate of 4.10%. Typical advertised rates averaged
    5.57% over the same period – these borrowers have negotiated discounts that
    average 1.46 percentage points below typical advertised rates. Over 80% of these
    borrowers negotiated a discount of one percentage point or more.

Among borrowers who have taken out a new mortgage during the past year, 50%
obtained the mortgage from a Canadian bank and 30% from a mortgage broker. Other
categories accounted for 20% of new mortgages.




Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                            Page 7
Payment Increases and Lump Sum Payments

During the past year, 16% of Canadian mortgage holders voluntarily increased their
regular mortgage payments. The amount of increase is estimated at about $150 million
per month, or $1.8 billion per year, if sustained. More than one-half of the increases (an
annualized $950 million) were made by people who purchased their homes during 2005
to 2010.

In addition, 13% of mortgage holders made lump sum payments, for an estimated total
amount of $7.8 billion, or about 1% of the total outstanding mortgage principal. 65% of
the total (just over $5 billion) was made by people who purchased their homes during
2005 to 2010.

One consequence of these payments is that for many borrowers, actual amortization
periods will be shorter than the contracted periods.

A second important consequence is discussed in the major section on impacts of rising
interest rates.


Missing Mortgage Payments

The vast majority (93%) of mortgage holders have never missed a payment; 7% have
missed a payment at some time. This includes 4% who have missed a payment during
the past year. The survey data on missed payments indicates that recent purchases
and extended amortization periods are no more risky than are prior purchases and
shorter amortization periods.


The Role of Rental Income

Out of Canada’s 5.55 million home owners with mortgages:

•   About 325,000 have rental units within their primary dwellings, from which they
    currently receive rental income.
•   About 150,000 have rental units from which they do not currently receive income.
•   About 5.1 million do not have rental units in their dwellings.

The rental income is an important factor in access to home ownership, and the supply of
affordable rental housing is an important element of Canada’s socio-economic
environment.


Rising Interest Rates Will Bring Challenges

The recent economic recession pushed Canadian interest rates to very low levels, which
has encouraged robust home buying activity. The developing economic recovery is
almost certain to cause interest rates to increase towards more normal levels. A very
important question for the housing market and mortgage markets, and by extension for

Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                            Page 8
the Canadian economy as a whole, is to what extent mortgage borrowers will be able to
accommodate increased mortgage costs.

This report has conducted simulations of the impact of mortgage rate increases – to an
assumed 5.25% – on consumers’ mortgage payments and on their ability to afford the
increased payments. The survey asked mortgage holders to indicate their ability to
absorb increased mortgage costs. Combining the estimates of mortgage cost increases
with the consumers’ tolerances, the following estimates have been developed. Out of
about 5.55 million mortgage holders:

•   1.0 million mortgage borrowers may see reductions in their costs, as their current
    interest rate exceeds the 5.25% future rate.
•   3.7 million may see increased costs, but within their tolerances.
•   375,000 indicate that they already have difficulties with their payments and will face
    increased costs.
•   475,000 may see increases that exceed their tolerances.

The author wants to be clear that these estimates should be seen as a first draft. There
are other factors that will mitigate the challenges:

•   It was shown earlier that there have been widespread voluntary increases in regular
    mortgage payments and lump sum payments. This has the effect of reducing
    amortization periods for a very large share of mortgage borrowers. It means that if
    mortgage payments increase by unaffordable amounts, many borrowers will have
    the option to scale back their payments, by taking advantage of the original
    amortization agreements.
•   Many mortgage borrowers are paying more than they are required to. Analysis of
    the survey data suggests that for about 40% of borrowers, payments are at least
    $100 per month more than required, which gives them flexibility to adjust payments
    in the event of future challenges.
•   In short, while higher interest rates will bring higher interest costs, in many cases the
    increases in monthly payments will not be as large.
•   Most mortgage borrowers have considerable amounts of mortgage equity. Among
    those who appear to be at risk of unaffordable increases in mortgage costs, 90%
    have more than $20,000 in equity and 70% have more than $50,000. In a worst-
    case outcome, selling the property is a viable exit option for most borrowers.
•   CAAMP’s special January 2010 report “Revisiting the Canadian Mortgage Market –
    Risk is Small and Contained” reviewed a large number of mortgage transactions
    (about 40,000, totaling about $10 billion in principal) that were made in 2009, and
    found that a very large majority of the borrowers had left themselves considerable
    room to absorb increased mortgage rates. A large majority of the mortgages have
    fixed rates, with long-terms: by the time the next renewal occurs incomes will have
    increased by about the same amount as the monthly payments. For the minority of
    mortgages that have variable rates, the lenders tested the borrowers’ ability to afford
    payments based on a higher interest rate (typically, 4.0%). Increases in rates to
    more than 4% will challenge some of these borrowers, but CAAMP’s analysis of the
    data found that most have sufficient room to afford an interest rate as high as 5.25%.



Canadian Association of Accredited Mortgage Professionals                         May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                               Page 9
•   Concerns expressed have mainly been related to variable rate mortgages. This
    survey finds that during the past year about 400,000 holders of variable rate
    mortgages have locked-in with fixed rate mortgages.

Increased mortgage rates will bring stresses for Canadian mortgage borrowers, but a
very substantial majority of them are prepared.


Outlook for the Housing and Mortgage Markets

The Canadian housing and mortgage markets experienced strong growth for most of the
past decade, mainly due to rapid job creation. However, the Canadian economy
reversed direction late in 2008, and the housing market was weak during late 2008 and
early 2009. Mortgage demand slowed.

The recovery of housing demand during 2009 and into 2010 has caused mortgage
activity to expand rapidly once again.

Forecasts are that housing market activity will soon slow: temporary factors that
bolstered housing demand are expected to wane. Forecasts shown in section 5 of this
report suggest that:

•   The volume of resale activity will be in the range of $172 billion this year but slow to
    $163 billion in 2011. In both years the volume would be considerably higher than the
    $149 billion figure for 2009.
•   Housing starts might total 182,000 in 2010 and 179,000 in 2011, much lower than
    was seen prior to the recession, but a substantial improvement from about 149,000
    in 2009.

The forecasts of housing activity have been used to generate forecasts of mortgage
activity:

• The volume of outstanding residential mortgage credit is forecast to continue growing,
  but at a slower rate than prior to the recession. For 2010, the growth rate is forecast
  at 8.5% ($82 billion), followed by 8.7% growth in 2011 ($91 billion). By contrast, the
  growth rate was 12.4% in 2007 and 10.3% in 2008.
• About mid-2010, the volume of outstanding residential mortgage credit in Canada
  would pass $1 trillion, and the total at the end of 2010 would be $1.04 trillion. For the
  end of 2011, the forecast is $1.13 to $1.14 trillion.
• The volume of annual approvals (including new mortgages, transfers of existing
  mortgages between lenders, and refinances) should expand during 2010, to a
  forecast of $228 billion. Slower activity is forecast for 2011 ($218 billion, which is still
  a very substantial amount).




Canadian Association of Accredited Mortgage Professionals                          May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                               Page 10
About CAAMP

CAAMP is the national organization representing Canada’s mortgage industry. With
12,000 mortgage professionals, its membership is drawn from every province and from
all industry sectors. This diversified membership enables CAAMP to bring together key
players with the aim of enhancing professionalism.

Established in 1994, CAAMP has taken a leadership role in Canada’s mortgage lending
industry and has set the standard for best practices in the industry.

In 2004, CAAMP established the Accredited Mortgage Professional (“AMP”) designation
to enhance educational and ethical standards for Canada's mortgage professionals.

CAAMP’s other primary role is that of consumer advocate. On an ongoing basis CAAMP
aims to educate and inform the public about the mortgage industry. Through its
extensive membership database, CAAMP provides consumers with access to a cross-
country network of the industry’s most respected and ethical professionals.


About the Author

Will Dunning is an economist, and has specialized in the analysis and forecasting of
housing markets since 1982. In addition to acting as the Chief Economist for CAAMP he
operates an economic analysis consulting firm, Will Dunning Inc.


About Maritz

Maritz Research is a wholly owned subsidiary of Maritz Inc., the largest performance
improvement company in the world, headquartered in St. Louis, Missouri. For more than
20 years, Maritz Inc. has been the largest provider of customer satisfaction research in
the United States and a major supplier of brand equity research. In Canada, Maritz
Research has been developing marketing research solutions for Canadian clients under
the brand Maritz-Thompson Lightstone since 1977, and has grown to become one of
Canada’s largest full-service marketing research consultancies.


Disclaimer

This report has been compiled using data and sources that are believed to be reliable.
CAAMP, Maritz, Will Dunning, and Will Dunning Inc. accept no responsibility for any data
or conclusions contained herein.

The opinions and conclusions in this report are those of the author and do not
necessarily reflect those of CAAMP or Maritz.




Canadian Association of Accredited Mortgage Professionals                     May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                          Page 11
2.0    Consumers’ Expectations About Housing Markets

Data used in this section was obtained via an online survey conducted during April 2010
by Maritz (a national public opinion and market research firm) on behalf of CAAMP. This
is referred to below as the “CAAMP/Maritz” study.

Since the fall of 2006 the survey has included questions on opinions and expectations
about local housing markets. The questions generally asked consumers to give their
responses on a 10 point scale, where a score of 1 would be very negative, 10 would be
very positive, and scores of 5 or 6 would be neutral.


“Is Now a Good Time or a Bad Time to Buy a New Home in Your Community?”

Consumer responses remain positive overall, although slightly less than in the two prior
surveys.

• There was a small increase in the share of respondents who gave negative ratings (of
  1 to 4, which rose to 18% from 16% last fall.
• There was also a small rise in the neutral range (5 to 6 out of 10, which rose to 32%
  from 29% last fall).
• Correspondingly, there was a drop for positive responses (7 to 10, to 50% from 55%
  last fall).
• As is shown in the table below, the average rating out of 6.23 out of 10 is lower than
  during the two prior surveys. But, the current rating is substantially higher than was
  found in the five surveys from fall 2006 to fall 2008, when the average rating was 5.44
  out of 10. The spring 2010 survey continues to show positive attitudes to local
  housing markets in Canada.
• However, these positive responses do not necessarily indicate that home buying will
  increase, as will be discussed shortly.

                                          Table 2-1
          Consumers’ Ratings for “Is Now a Good Time or a Bad Time to Buy a
                             New Home in Your Community?”
                                                  % Giving Rating
                Rating
                                   Spring 2009       Fall 2009      Spring 2010
          1 (Very Bad Time)             8%              4%               3%
                   2                    2%               2%              1%
                   3                    5%               4%              5%
                   4                    7%               6%              8%
                   5                   12%              13%             13%
                   6                   14%              16%             19%
                   7                   15%              18%             18%
                   8                   18%              19%             19%
                   9                    8%               8%              7%
         10 (Very Good Time)           13%              11%              6%
                 Total                100%             100%             100%
           Average Rating
                                       6.46             6.56             6.32
              (out of 10)
         Source: Maritz survey for CAAMP, Spring and Fall 2009 and Spring 2010.
Canadian Association of Accredited Mortgage Professionals                         May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                              Page 12
Across the different regions of the country, findings are mixed:

• A year ago, attitudes were most positive in the three provinces that have the highest
  house prices (British Columbia, Alberta, and Ontario). In these provinces, attitudes
  went from well above average a year ago to current closer-to-average figures.
• On the other hand, attitudes have been relatively stable in the remaining regions.
  (However, Quebec saw a substantial rebound compared to a year earlier.
  Consumers in Quebec now give an average rating similar to the national average.).
• In all regions, more consumers gave positive ratings (scores of 7 to 10) than negative
  ratings (scores of 1 to 4).
• From these results it appears that housing affordability is the primary factor.


“How Likely are You to Purchase a New Property in the Next Year?3”

This question was asked for the first time in the fall of 2008. As with other questions in
this section, responses were given on a 10-point scale. A rating of 10 indicates
“definitely will” buy a property and 1 indicates “definitely will not”.

Each year, relatively few households buy a home, typically in the range of 4% to 6%4.
Therefore, it is not surprising that only a small minority of consumers indicate that they
definitely will buy a property, or are highly likely to. In both the fall of 2009 and the
spring of 2010, only about 3% of consumers gave ratings of 9 or 10.


                                           Table 2-2
              Consumers’ Ratings for “How Likely are You to Purchase a New
                                  Property in the Next Year?”
                                                   % Giving Rating
                 Rating
                                    Spring 2009        Fall 2009      Spring 2010
          1 (Definitely Will Not)       52%              56%              49%
                     2                  10%               9%               8%
                     3                   8%               8%              12%
                     4                   5%               5%               9%
                     5                   6%               5%               6%
                     6                   6%               5%               6%
                     7                   6%               5%               4%
                     8                   3%               3%               2%
                     9                   2%               2%               1%
           10 (Definitely Will)          3%               2%              2%
                  Total                100%              100%            100%
             Average Rating
                                        2.86              2.63            2.86
               (out of 10)
          Source: Maritz survey for CAAMP, Spring and Fall 2009, Spring 2010.


3
  They full question indicated that “this could be a primary residence, or could be a second residence or
investment property”.
4
  During 2005 to 2007, about 700,000 new and resale homes were bought annually by Canada’s 13 million
households. The totals for 2008 and 2009 were lower, at about 650,000 and 600,000, respectively.
Canadian Association of Accredited Mortgage Professionals                                     May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                                          Page 13
It might seem that there are inconsistencies between the positive responses given to the
question on whether this is a good time to buy versus the weak expectations about
buying. The interpretation offered here is that consumers see favourable conditions in
housing affordability (due to low interest rates), and see it in general as a good time to
buy. On the other hand, consumers’ weak intentions to buy are being influenced by their
own situations. An additional important factor is that housing markets across Canada
have been very strong since last summer, and the pool of potential buyers has been
depleted – these survey results suggest that there are fewer Canadians in a position to
buy homes. The implication is that that home-buying could slow during the remainder of
this year.


“To What Extent do You Think Housing Prices in Your Community Will Go Up or
Down in the Next Year?

Expectations about house prices have become more positive. As is shown in the next
table, as of the spring 2010 survey consumers’ expectations are very different compared
to a year ago. In the spring of 2009, more consumers expected prices to fall (33%) than
to rise (19%). This year, on the other hand, few Canadians expect prices to fall (7%).
Almost one-half (49%) expect prices to rise and a further 44% express neutral opinions
(5 or 6 on a 10-point scale). The average rating of 6.46 out of 10 is the highest found in
the eight times that this survey has been conducted.

                                         Table 2-3
     Consumers’ Ratings for “To What Extent Do You Think Housing Prices in Your
                    Community Will Go Up or Down in the Next Year?”
                                                   % Giving Rating
             Rating
                                 Spring 2009          Fall 2009          Spring 2010
          1 (Go Down
                                     2%                  1%                   1%
          Dramatically)
               2                     2%                  0%                   1%
               3                     9%                  1%                   1%
               4                     20%                 6%                   4%
               5                     19%                16%                  14%
               6                     29%                37%                  30%
               7                     11%                26%                  30%
               8                     5%                 10%                  13%
               9                     1%                  2%                   4%
     10 (Go Up Dramatically)         1%                  2%                  3%
              Total                 100%                100%                100%
         Average Rating              5.27                6.25                6.46
     Source: Maritz survey for CAAMP, Spring and Fall 2009, Spring 2010.


The spring 2010 survey found that expectations are very similar across the country. All
regions have seen very substantial rebounds compared to a year ago.




Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 14
“To What Extent Do You Think Mortgage Rates Will Change in the Next Year?”

In CAAMP’s prior surveys, expectations about mortgage interest rates have been
generally neutral. A year ago, about one-half of Canadians gave scores of 5 or 6 to this
question and about one-quarter gave scores slightly above or below neutral (4 or 7).
However, this year there has been a sharp change in expectations about interest rates:
about 70% expect rates to rise to some degree and virtually no one expects interest
rates to fall. The change this year is not surprising given that there has been
widespread commentary – including from senior government officials – that interest rate
increases are inevitable.

                                         Table 2-4
            Consumers’ Ratings for “To What Extent Do You Think Mortgage
                           Rates Will Change in the Next Year?”
                                                   % Giving Rating
                    Rating
                                         Spring 2009            Spring 2010
                 1 (Go Down
                 Dramatically)                1%                    0%
                      2                       2%                    0%
                      3                       7%                    0%
                      4                      13%                    1%
                      5                      26%                    9%
                      6                      27%                    19%
                      7                      14%                    38%
                      8                       7%                    23%
                      9                       1%                    6%
            10 (Go Up Dramatically)          2%                     3%
                     Total                  100%                   100%
                Average Rating               5.49                   7.01
            Source: Maritz survey for CAAMP, Spring 2009 and Spring 2010.


There has been a great deal of speculation about the impacts of rising interest rates on
Canadian mortgage borrowers. A January 2010 report by CAAMP “Revisiting the
Canadian Mortgage Market – Risk is Small and Contained” analyzed data on recent
mortgage transactions and concluded that the vast majority of borrowers have sufficient
room to tolerate higher interest rates. The fourth major section of this report further
explores this very important issue, using data from CAAMP’s April 2010 consumer
survey.




Canadian Association of Accredited Mortgage Professionals                     May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                          Page 15
3.0     Profile of Mortgage Holders

This section uses data from the consumer survey to highlight consumer choices in the
mortgage market. As in prior issues, this section provides data on mortgage types and
terms, amortization periods, interest rates, home owners’ equity, and equity take-out.

For this edition of CAAMP’s report, the survey and analysis have been expanded, to
allow analysis of “mortgage lifecycles” – variations in choices made at different ages and
in different circumstances. Other expanded data in this edition covers voluntary
“locking-in” (switching from variable to fixed rate mortgages), mortgage payment
increases and lump sum payments, missing mortgage payments, and the role of rental
income in mortgage qualification.


Dimensions of the Mortgage Market

There are currently about 13.3 million households in Canada5, including:

•   9.3 million homeowners, of which 5.55 million have mortgages and 3.75 million are
    mortgage-free
•   4.0 million tenants.

Data from the CAAMP/Maritz survey indicates that the average mortgage amount is
about $138,000. For the 5.55 million home owners with mortgages, the total outstanding
mortgage principal is an estimated $770 billion6.


Recent Mortgage Activity

In the CAAMP/Maritz study, 24% of home owners had some mortgaging activity during
the preceding 12 months, including:

•   Taking out a new mortgage (about 700,000 households, or 7% of home owners).
    This includes mortgages taken out on newly purchased properties as well as
    mortgages on properties that were previously mortgage-free. For these mortgages,
    the average principal is $179,000 and the total current principal is $127 billion.
•   Renewing, renegotiating, or transferring the current mortgage (1.4 million
    households, or 17% of home owners). The average principal for these mortgages is
    $128,000 and the total outstanding principal is $180 billion.
•   Paying off the mortgage (about 300,000 households, or 3% of home owners).


5
  The estimates of households by tenure are based on data from the 2006 Census, updated based on housing
completions, changes in vacancies, and for under-coverage (the estimated share of the population that was
not counted in the 2006 Census).
6
  This is lower than $970 billion total reported by the Bank of Canada for residential mortgages (source:
Weekly Financial Statistics, April 23, 2010). The Bank of Canada data includes investment properties as
well as second residences, whereas the CAAMP/Maritz estimates is for dwellings occupied by the owners
as their principal residences.
Canadian Association of Accredited Mortgage Professionals                                    May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                                         Page 16
•   These three categories add to more than the total of 24% because some households
    had more than one activity during the past year.
•   About 7.1 million home owners (76% of all home owners) had no mortgage activity
    during the past 12 months. This includes about 3.6 million households with
    mortgages. Their average mortgage principal is $136,000 and their total outstanding
    principal is $494 billion.


Fixed Rate Versus Variable Rate Mortgages

The CAAMP/Maritz study found that among mortgage holders 64% (3.6 million
households) have fixed rate mortgages, 31% (1.7 million) have variable and adjustable
rate mortgages, and 5% (300,000) have “combination” mortgages, in which part of the
payment is based on a fixed rate and part is based on a variable rate.

Among mortgages that have been transacted during the past year, the proportions are
essentially the same as the shares shown above for all mortgages: 65% fixed rate, 29%
variable or adjustable, and 6% combination.

A more detailed examination finds that there are differences, depending on “life-cycle”
factors.

Fixed rate mortgages are slightly more common for the younger age groups; conversely,
older age groups are slightly more likely to choose variable rate mortgages.
Combination mortgages are chosen by small minorities within each age group.

                                       Table 3-1
                           Percentages of Mortgages by Type,
                                    By Age Group
    Mortgage Type        18-34            35-54           55 +            Total
    Fixed-rate           66%              64%             61%             64%
    Variable or
                          29%              30%              35%           31%
    adjustable-rate
    Combination            5%               5%             4%              5%
    All Types            100%              100%           100%            100%
    Source: Maritz survey for CAAMP, Spring 2010.


For mortgages that have been originated during the past 12 months (either as the result
of purchasing a property or taking out a mortgage on a previously mortgage-free
property), younger age groups were more likely to take a fixed rate mortgage than are
older age groups.




Canadian Association of Accredited Mortgage Professionals                    May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                         Page 17
                                         Table 3-2
                             Percentages of Mortgages by Type,
                    For Mortgages Originated During the Past 12 Months
                                      By Age Group
    Mortgage Type         18-34             35-54             55 +         Total
    Fixed-rate             69%               62%             50%           64%
    Variable or
    adjustable-rate        25%              27%              50%           29%
    Combination             6%               11%              0%            7%
    All Types             100%              100%             100%          100%
    Source: Maritz survey for CAAMP, Spring 2010.

The next table looks at mortgages that have been renewed, renegotiated, or transferred
during the past 12 months, and considers when the properties were purchased. It finds
that for homes purchased during the past decade, there is more use of fixed rate
mortgages than for homes that were purchased prior to 2000. Looking even more
narrowly: for homes that were purchased during the past decade, there are essentially
no differences for those purchased in the first and second halves of the decade.


                                          Table 3-3
                             Percentages of Mortgages by Type,
    For Mortgages Renewed, Renegotiated, or Transferred During the Past 12 Months,
                               By Period of Property Purchase
    Mortgage Type      Before 2000        2000-2004        2005-2009      Total
    Fixed-rate             59%               69%              67%          65%
    Variable or
                           36%               25%              28%          30%
    adjustable-rate
    Combination             5%                6%               5%           6%
    All Types             100%               100%             100%        100%
    Source: Maritz survey for CAAMP, Spring 2010.


Mortgage Terms

The CAAMP/Maritz study examined lengths of mortgage terms. This measures the
length of the mortgage terms at the time of contracting – the actual remaining term will
be shorter, depending on when the mortgage was contracted. The data indicates that in
total, 66% of mortgages have terms of five years or more. Conversely, just 13% have
terms of one or two years and 21% have terms of three or four years.

The survey data shows that younger borrowers are more likely to select longer terms
than are older borrowers.




Canadian Association of Accredited Mortgage Professionals                     May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                          Page 18
                                         Table 3-4
                       Percentages of Mortgages by Length of Term,
                                       By Age Group
          Length of Mortgage                       Age Group
                 Term             18-34       35-54         55 +      All Ages
                1 year              3%          8%           7%          6%
               2 years              4%          9%           8%          7%
               3 years             11%         12%          12%         12%
               4 years              9%          8%          11%          9%
               5 years             49%         42%          42%         44%
           More than 5 years       24%         22%          19%         22%
                 Total            100%        100%         100%        100%
          Source: Maritz survey for CAAMP, Spring 2010

The following three tables drill more deeply into this data.

The next table looks at borrowers who have been active in the past year (originating a
new mortgage or renewing, renegotiating or transferring an existing mortgage). This
data shows that during the past year the preference for longer terms has become even
more pronounced – 70% of these borrowers have chosen terms of five years or longer.

                                         Table 3-5
                       Percentages of Mortgages by Length of Term,
                                       By Age Group
                   For Mortgages Transacted During the Past 12 Months
          Length of Mortgage                       Age Group
                 Term             18-34       35-54         55 +     All Ages
                1 year              3%          7%           8%         6%
               2 years              3%          3%           6%         4%
               3 years              6%          8%          12%         8%
               4 years             15%         11%          12%        13%
               5 years             50%         48%          41%        47%
           More than 5 years       24%         23%          22%        23%
                 Total            100%        100%         100%       100%
          Source: Maritz survey for CAAMP, Spring 2010

The next table parses the data even more finely. It focuses on mortgages that have
been originated during the past year (as the result of taking out a mortgage on a newly
purchased property or else taking out a mortgage on a property previously owned that
had been mortgage-free). This data is based on a small portion of the survey data set –
just 153 out of the sample of 3,000 Canadians. As such, there is a risk that the
estimates are statistically unrepresentative, and that the true state of affairs might be
different. However, the estimates generated from this data are quite similar to prior
estimates (in CAAMP’s January 2010 report “Revisiting the Canadian Mortgage Market
– Risk is Small and Contained”, which was based on a database of about 40,000
mortgage transactions). This, while acknowledging that the estimates shown in the next
table may have a margin of error, the author is confident that they reasonably portray
mortgage choices that have been made during the past year.


Canadian Association of Accredited Mortgage Professionals                        May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                             Page 19
This data shows that almost 80% of young borrowers have opted for the security of a
fixed rate mortgage or a mortgage that combines fixed and variable rates, and the vast
majority of them are taking medium (three or four years) and long-terms (five or more
years). Only about one-fifth of the younger borrowers chose variable rate mortgages. In
older age groups there is an increased tendency to choose variable rate mortgages.

                                        Table 3-6
           Percentages of Mortgages by Type of Mortgage and Length of Term,
                                      By Age Group,
                  For Mortgages Originated During the Past 12 Months
                                                   Mortgage Term
                 Mortgage
     Age Group                                              5 or More
                 Type            1-2 Years    3-4 Years                  Total
                                                              Years
                 Fixed              2%          18%            53%       74%
                 Variable           0%           4%            17%       21%
     18-34
                 Combination        1%           1%             3%        5%
                 Total              3%          24%            73%       100%
                 Fixed             10%          13%            45%       68%
                 Variable           2%           2%            21%       25%
     35-54
                 Combination        0%           2%             6%        8%
                 Total             12%          17%            71%       100%
                 Fixed              0%           0%            55%       55%
                 Variable           0%          12%            33%       45%
     55 +
                 Combination        0%           0%             0%        0%
                 Total              0%          12%            88%       100%
                 Fixed              4%          14%            51%       69%
                 Variable           1%           4%            20%       25%
     All Ages
                 Combination        1%           1%             3%        5%
                 Total              6%          20%            74%       100%
     Source: Maritz survey for CAAMP, Spring 2010


The last view of this data looks at mortgage choices among borrowers who have
originated a mortgage within the past year, as a first-time home buyer. This data shows,
once again, that there is a majority preference for fixed rate mortgages, most of which
have medium and long terms.

                                        Table 3-7
              Percentages of Mortgages by Type of Mortgage and Length of
                           Term, For First-Time Home Buyers,
                    Mortgages Originated During the Past 12 Months
                                             Mortgage Term
           Mortgage
           Type                                       5 or More
                           1-2 Years    3-4 Years                  Total
                                                        Years
           Fixed              5%           15%           51%       71%
           Variable           0%            4%           19%       23%
           Combination        1%           1%             4%        6%
           Total              6%           20%           74%       100%
           Source: Maritz survey for CAAMP, Spring 2010

Canadian Association of Accredited Mortgage Professionals                     May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                          Page 20
The data developed in this and the prior section, on mortgage types and mortgage
terms, suggests that there is evolution in consumers’ choices as they progress through
their life-cycles. Initially, there is a preference for the predictability of a fixed rate
mortgage, and usually with a long term. Over time, as households become more
experienced and especially as they build equity, they become more willing to face
uncertainty and to take advantage of the lower costs that are usually associated with
variable rate mortgages and shorter mortgage terms.

That said, there is a significant minority of young borrowers who opt for variable rate
mortgages. These borrowers are taking on more risk. A key question, and a question
that has received a great deal of attention during the past year, is whether these
borrowers are taking on reasonable or unreasonable risks, especially considering that
mortgages rates are almost certain to rise during the coming years, and by non-trivial
increments. That question is explored in section 4 of this report.


Locking-in Mortgage Rates

For home owners who have a fixed rate mortgage, a follow-up question asked: “was this
a variable-rate mortgage that you turned into fixed (or “locked in”) because rates were
good, or was it a fixed rate mortgage when you obtained it or last renewed it?”

The responses indicate that there has been a substantial amount of lock-in activity:
among those with fixed rate mortgages, 12% (about 400,000 households) had locked-in
from variable rate mortgages during the past 12 months. A further 10% (350,000
households) had locked-in more than a year ago.

Not surprisingly, among those who locked-in during the past 12 months, a very high
share selected long terms (63% took terms of five years or more and a further 26% took
terms of three or four years). For households that have locked-in fixed rates during the
past 12 months, the current average mortgage rate is 4.02%.


Mortgage Amortization Periods

Mortgage holders were asked “At the date that you first took out the mortgage on the
property, what was the amortization length of the mortgage?” This question is of
considerable interest, since longer amortization periods (greater than 25 years) are a
relatively new phenomenon in Canada, having become available only about 4 years ago;
in the fall of 2008 the federal government ceased guaranteeing new mortgages with
amortization periods greater than 35 years (there is still some availability of 40 year
amortization periods for mortgages without mortgage insurance).

A small minority of mortgage consumers (17%) have amortization periods of more than
25 years. Interestingly, the share of mortgages with extended amortizations has
stabilized – a year ago the share was also 17%. The table below provides more detail,
showing amortization periods for various categories of mortgaging activity. Among those
who during the past 12 months have taken out a new mortgage (on a home that they
have just purchased or on a previously mortgage-free property), more than one-half
(64%) opted for an amortization period of 25 years or less, and just over one-third (36%)
Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 21
selected an extended amortization period of more than 25 years. This is a change from
a year ago, when the CAAMP/Maritz survey found that 46% of new mortgages were for
extended amortization periods. During the past year there has been some commentary
which has assumed that very high proportions of recent activity have been for extended
amortization periods. This data suggests the opposite, that new mortgage borrowers
have become more cautious insofar as amortization periods are concerned.

                                        Table 3-8
                      Percentages of Mortgages by Length of Original
                  Amortization Period, By Activity During Last 12 Months
                                               Renewal
       Amortization Period   New Mortgage Renegotiation Not Active         Total
                                              or Transfer
      Up to 25 Years              64%             88%           83%        83%
      More Than 25 Years          36%             12%           17%        17%
      Including…
         30 years                 8%               4%            7%         7%
         35 years                 27%              5%            4%         7%
         40 years                 1%               3%            5%         4%
      Total                      100%            100%          100%        100%
      Source: Maritz survey for CAAMP, Spring 2010.


Types of Mortgage Professionals Consulted

Mortgage holders were asked which types of mortgage professionals they consulted
when obtaining their current mortgages and, secondly, through which type of mortgage
professional they obtained their mortgage. The two tables below summarize the data,
focusing on consumers who obtained their current mortgage during the past 12 months
(either a new mortgage or a renewal, renegotiation, or transfer of an existing mortgage).

The first table shows shares for new mortgages separately from mortgages that have
been renewed, renegotiated, or transferred. The second data column shows that for
new mortgages, 50% were obtained from a bank, 30% from a mortgage broker, and
20% were obtained from other types of mortgage professionals. The fourth data column
shows that for mortgages that were renewed, etc., 56% were obtained from a bank and
20% from a mortgage broker.

The second table combines the results for the two types of activities, and shows the
shares by region. This table indicates that the share for banks was 54% nationally, with
the highest shares in the Atlantic provinces, Quebec, and Saskatchewan. For mortgage
brokers, the share was 23% nationally, with the highest shares in British Columbia and
Alberta.




Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 22
                                               Table 3-9
                 Consumers’ Use of Mortgage Professionals During the Past 12 Months
                                        New Mortgage          Renewal, Renegotiation, or Transfer
                                  Consumer        Obtained        Consumer           Obtained
   Type of Mortgage
                                  Consulted        Through        Consulted           Through
   Professional
                                  Mortgage        Mortgage        Mortgage           Mortgage
                                 Professional    Professional   Professional       Professional
   Representative from a
                                     63%             50%            66%                 56%
   Canadian Bank
   Mortgage Broker                   53%             30%            40%                 20%
   Representative from a
                                     31%             15%            29%                 20%
   Credit Union
   Representative from a Life
   Insurance or Trust                13%              4%            11%                  3%
   Company
   Other                             2%               1%             3%                  1%
   Total                            163%            100%            148%               100%
   Source: Maritz survey for CAAMP, Spring 2010.


                                              Table 3-10
             Consumers’ Use of Mortgage Professionals During the Past 12 Months, By Region
Type of Mortgage                                                                    British
                       Atlantic Quebec    Ontario Manitoba      Sask’n    Alberta             Canada
Professional                                                                      Columbia
Representative from
a Canadian bank         69%      37%       65%        50%        65%       54%       44%        54%
Mortgage broker         20%      17%       24%        19%        10%       32%       33%        23%
Representative from
a credit union           7%      41%        6%        31%        20%       12%       19%        19%
Representative from
a life insurance or
trust company            4%       4%        3%        0%         5%         2%       3%        3%
Other                    0%       1%        2%        0%         0%         0%       1%        1%
Total                   100%     100%      100%      100%       100%      100%      100%      100%
Source: Maritz survey for CAAMP, Spring 2010.


      Interest Rates

      The CAAMP/Maritz study collected data on mortgage interest rates for current mortgage
      holders. The average mortgage interest rate for these mortgage borrowers is 4.09% as
      of the spring of 2009, down from 4.83% in the spring of 2009 and 4.55% in the fall of
      2009.

      Very few mortgages in Canada have high interest rates. In this survey, just 1.3% of
      mortgage rates are 8% or higher.

      The next table looks at average mortgage interest rates by type of mortgage, depending
      on the time since the initiation of the mortgage.

      This survey data indicates that:

      Canadian Association of Accredited Mortgage Professionals                      May 2010
      “Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 23
• Interest rates vary depending on mortgage type. Fixed rate mortgages have an
  average rate of 4.80%, versus 2.60% for variable rate mortgages and 4.33% for
  combination type mortgages. On average, variable rate mortgages have rates 2.2
  percentage points lower than the rates for fixed rate mortgages.
• Mortgages that have been initiated during the past year have, on average, lower
  interest rates compared to mortgages that were initiated more than a year ago.
• For fixed rate mortgages, the average rate for mortgages initiated during the past six
  months (4.11%) is almost a full percentage point lower than for mortgages that were
  initiated a year or more ago (5.07%).
• For variable rate mortgages, the lowest interest rates are found for mortgages that
  were initiated more than a year ago, although the differences are minor, on average.

                                         Table 3-11
        Average Mortgage Interest Rates by Mortgage Type and Time Since Initiation
                                                    Mortgage Type
Time Since Initiation of Mortgage                     Variable or                All Types
                                      Fixed-rate                    Combination
                                                    adjustable-rate
Within the Past 6 Months                4.11%           2.66%         3.71%       3.63%
Between 7 Months to 12 Months Ago       4.25%           2.70%         5.64%       3.92%
1 or More Years Ago                     5.07%           2.57%         4.26%       4.30%
Total                                   4.80%           2.60%         4.33%       4.09%
Source: Maritz survey for CAAMP, Spring 2010.


The survey also asked those who have renewed a mortgage what the interest rate was
prior to renewal, and those rates have been compared to the mortgage borrowers’
current rates. The results are summarized in the next table. It shows that among
borrowers who have renewed a mortgage in the past 12 months almost three-quarters
had a reduction in their interest rate. On average, for all mortgages renewed during the
past 12 months, the interest rate was reduced by 1 percentage point.

                                         Table 3-12
                            Changes in Mortgage Interest Rates for
                       Mortgages Renewed During the Past 12 months
                                   Within the Past    Between 6 Months
      Change in Interest Rate                                               Total
                                      6 Months        to 12 Months Ago
      % with Rate Decreased             73%                  76%            74%
      % with Rate Unchanged              6%                  5%             6%
      % with Rate Increased             21%                  18%            20%
         % with Rate Increased
                                         8%                   9%             8%
         by 1 Point or More
      Total                             100%                100%           100%
      Average Change in
      Interest Rate                     -1.11               -0.88           -1.02
      (percentage points)
      Source: Maritz survey for CAAMP, Spring 2010.




Canadian Association of Accredited Mortgage Professionals                       May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                            Page 24
Combining the various estimates developed in this study:

• Out of 5.55 million home owners who have mortgages,
• About 1.4 million have renewed, renegotiated, or transferred their mortgages during
  the past 12 months.
• Just over 1 million have seen their mortgage rates fall; about 75,000 had no change
  in their interest rate.
• 275,000 to 300,000 had their rates increase.
• 100,000 of these households have seen increases of 1 percentage point or more.
  For many of these households, the increases in monthly mortgage payments may be
  significant, but in the big picture of the Canadian housing market, in which there are
  9.3 million home owning households, this is an insignificant change.

The data from this study indicates that very few mortgage borrowers have been
negatively affected by increases in interest rates for their mortgages.

A further analysis estimates changes in annual interest costs that have occurred for
households who renewed, renegotiated or transferred their mortgages during the past 12
months. While some of these households have seen increased interest costs, the
majority have seen reductions. On average (combining borrowers with increases and
those with reductions) annual interest costs fell by slightly more than $1,000. For these
households, the total interest saving is about $1.5 billion per year.


Mortgage Rate Discounting

The average mortgage interest rate reported here (4.09%, for all current mortgages) is
well below the typical posted (advertised) rates that have been available during the past
six months7. During that period, posted rates for five year terms averaged 5.55%. The
much lower actual rates confirm that there is a substantial amount of discounting in the
mortgage market.

This section uses the survey data to generate an estimate of the extent of discounting.

The study group includes a wide range of mortgages, including a full range of remaining
terms, fixed rate versus variable rate mortgages, and the mortgages have been
originated over a prolonged period. This results in a wide range of mortgage rates. In
order to produce a meaningful summary of the interest rates, one subset of the study
group was selected for further analysis:

•   Mortgages that were initiated, renewed, or refinanced during the past 6 months, and
    during 7 to 12 months ago.
•   With fixed rates, rather than variable rates.
•   With 5-year terms.



7
 Source: Bank of Canada. The averages are calculated using “Chartered Bank Administered Interest
Rates: Conventional Mortgage - 1 Year (as at Wednesday)”, (and for 5-year mortgages), using data for the
26 weeks from October 7, 2009 to March 31, 2010.
Canadian Association of Accredited Mortgage Professionals                                    May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                                         Page 25
For this group of mortgage borrowers:

•   For the most recent six months, the average mortgage interest rate is 4.08%. In
    contrast, the average posted 5-year mortgage rate was 5.55%. Based on this data it
    appears that Canadians negotiated mortgage rate discounts averaging 1.47
    percentage points (for 5-year terms).
•   For the period from 7 to 12 months ago, the average mortgage interest rate is 4.13%,
    while the average posted 5-year mortgage rate was 5.59, indicating that discounts
    averaged 1.45 percentage points.
•   Over 80% of these borrowers received a discount of one percentage point or more
    versus the posted mortgage rate.


Housing Equity

The following table summarizes estimates of home equity in Canada, based on data
obtained via the consumers’ survey.

For home owners with mortgages, the average amount of outstanding principal is about
$138,000. For home owners with mortgages, the owners’ estimates of the current
values of their homes average about $297,000. Therefore, home owners with
mortgages have an average of $159,000 in equity, and their home equity equates to
about 53% of the homes’ values. There are about 5.55 million Canadian home owners
with mortgages.

For home owners without mortgages, the average home value is about $317,000. There
are about 3.75 million Canadian home owners without mortgages.

Across the roughly 9.3 million home owners in Canada, the total value of homes is
estimated at $2.94 trillion. The total outstanding mortgage principal on these homes is
estimated at $770 billion. This means that Canadian home owners have about $2.06
trillion in home equity, which amounts to 70% of the total value of their homes.

                                         Table 3-13
               Calculation of Home Owner Equity in Canada, as of Spring 2010
                                              Average Per       Total      Number of
                                               Household      $ Billions  Households
    Mortgage Principal Outstanding             $138,000         $770
    Home Value for…
       Mortgage Holders                        $297,000        $1,650      5.55 million
       Non-Mortgage Holders                    $345,000        $1,290      3.75 million
       All Home Owners                         $317,000        $2,940       9.3 million
    Equity for Mortgage Holders                $159,000         $880
    Equity for All Home Owners                 $222,000        $2,060
    % Equity for Mortgage Holders                         53%
    % Equity for All Owners                               70%
    Source: Maritz survey for CAAMP, Spring 2010.
    Note: Figures may not add due to rounding.


Canadian Association of Accredited Mortgage Professionals                        May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                             Page 26
     Among Canadian home owners who have mortgages on their homes, most have
     considerable amounts of equity. The following table shows that only 1% of them have
     negative equity and only 7% have equity positions of less than 10%. A further 16% have
     equity positions in the range from 10% to 24.9%. More than three-quarters (78%) have
     25% or more equity.

                                                Table 3-14
                             Equity Positions of Current Mortgage Holders
                            Equity as Percentage of
                                                        % of Mortgage Holders
                                  Home Value
                                negative equity                  1%
                                    0-4.99%                      2%
                                    5-9.99%                      4%
                                  10-14.99%                      5%
                                  15-24.99%                     11%
                                  25-49.99%                     28%
                                  50-74.99%                     28%
                                 75% and over                   22%
                                      Total                     100%
                           Source: Maritz survey for CAAMP, Spring 2010.


     The survey asked mortgage holders to what extent they are comfortable with their equity
     position. The consumers’ responses showed that a small minority (just 4%) consider
     themselves “very uncomfortable” with their equity positions, and a further small minority
     (10%) report being “somewhat uneasy”. A large majority (81%) is comfortable - either
     “somewhat comfortable” (42%) or “very comfortable” (39%). The percentage of
     mortgage holders who are comfortable with their equity position to some degree has
     been recovered from the 74% share found a year ago. The levels of comfort show minor
     variations across the regions of Canada: in all regions, large majorities are comfortable
     with their equity positions.

                                          Table 3-15
                  Consumers’ Comfort Levels With Their Current Equity Positions
                                                                                     British
Comfort Level   Atlantic   Quebec   Ontario   Manitoba    Saskatchewan    Alberta              Canada
                                                                                    Columbia
Very
                   6%       2%       5%       3%               4%           7%        5%        4%
Uncomfortable
Somewhat
                   7%       8%      11%       14%              6%          13%        7%        10%
Uneasy
Somewhat
                  32%       48%     40%       33%              44%         49%        38%       42%
Comfortable
Very
                  51%       35%     38%       51%              37%         28%        46%       39%
Comfortable
Don’t Know or
                   4%       7%       6%       0%               9%           2%        4%        5%
Refused
Source: Maritz survey for CAAMP, Spring 2010.




     Canadian Association of Accredited Mortgage Professionals                         May 2010
     “Prudence Paying Off for Canadian Mortgage Borrowers”                              Page 27
Equity Take-out

The survey data indicates that 11% of mortgage holders took out equity from their
homes or increased the amount of the mortgage principal within the past twelve months.
This is a reduction from the 15% rate found a year ago. The average amount of equity
take-out fell, as well, to $33,500 from $42,500 a year ago.

Various findings from the survey can be combined to generate an estimate of the total
amount of equity take-out by Canadian home owners:

• At present there are about 9.3 million owner-occupied dwellings in Canada, of which
  about 5.55 million have mortgages.
• 11% of home owners with mortgages have taken out equity during the past year
  (about 600,000 households).
• The average amount taken out was about $33,500.
• Combining these factors, the total amount of equity take-out is calculated as $20
  billion during the past year, considerably lower than the $34 billion figure calculated
  for the prior year.

Across the country, there are small variations in the percentage of home owners that
have taken out equity. The proportion is highest in Manitoba and Saskatchewan (about
15%) and lowest in British Columbia (8%). The remaining provinces and regions (the
Atlantic region, Quebec, Ontario, and Alberta) are close to the national average.

Those who took out equity were asked what they used the money for. Some people
indicated more than one purpose. Based on the consumer responses, it is estimated
that:
• $8.4 billion (42%) of the money would be used for debt consolidation or repayment.
• $5.8 billion (29%) would be used for renovation or home repair.
• $2.8 billion (14%) would be used for purchases (including spending for education).
• $2.5 billion (13%) is for investments.
• $0.5 billion (3%) is for “other” purposes.

Given recent changes to mortgage insurance criteria, which impose a 90% loan-to-value
limit on refinanced mortgages, it is interesting to look at the amount of take-out,
segmented by loan-to-value ratios. The survey data, summarized in the next table,
suggests that out of the $20 billion in equity take-out that has occurred in the past year,
just 5% ($1 billion) was for loans that exceed 90% loan-to-value, and less than $2 billion
was for loans with LTVs from 80% to 89%.

                                       Table 3-16
                        Equity Take-Out, by Loan-to-Value Ratios
     Loan to-Value                                             90% or
                        < 70%       70-79%        80-89%                      Total
         Ratio                                                  More
      Amount of
       Take-Out          $13.3        $4.0          $1.6         $1.0         $20.0
      ($ Billions)
       % of Total
                          67%         20%           8%            5%          100%
       Take-Out
    Source: Maritz survey for CAAMP, Spring 2010.
Canadian Association of Accredited Mortgage Professionals                       May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                            Page 28
Payment Increases and Lump Sum Payments

New questions in the spring 2010 CAAMP/Maritz survey asked mortgage holders “in the
past 12 months, have you increased the amount of your mortgage payments or made
any lump sum contributions to your mortgage principal?” The survey responses indicate
that significant minorities of mortgage borrowers have taken advantage of these options,
which will shorten the repayment horizons for their mortgages:

•   16% of mortgage borrowers have increased their monthly payments. Combining the
    data obtained in the survey, the total increases amount to about $150 million per
    month, or $1.8 billion per year if those increased payments are sustained.
•   13% of mortgage borrowers made lump sum payments, with an estimated total of
    $7.8 billion, equivalent to 1% of the total outstanding mortgage principal.
•   These payments are in addition to the amortization that would occur via scheduled
    payments.
•   Some (5%) borrowers made both forms of extra payments.
•   75% of mortgage borrowers did neither, meaning that 25% made one or both of
    these forms of extra payment during the past 12 months.

In discussing the results in these two areas, the data will be looked at from two
perspectives: the length of time that has passed since the properties were purchased
and secondly, the original amortization periods of the mortgages.

The first table shows that those who purchased their properties during the 1990s and the
first of half of the 2000s were the most likely to increase their payments, while lump sum
payments were made most frequently by those who purchased during the 2000s.

                                         Table 3-17
                  Shares of Mortgage Holders Who Made Extra Payments
                During the Past 12 Months, By Year Property was Purchased
          Period of      Increased Amount       Made Lump
                                                                 Did Neither
          Purchase           of Payment       Sum Payment
          Before 1990            15%                8%              79%
          1990-1999              19%               10%              74%
          2000-2004              20%               14%              73%
          2005-2010              15%               14%              75%
          Total                  16%               13%              75%
          Source: Maritz survey for CAAMP, Spring 2010.
          Note: Totals add to more than 100% as some consumers made both
          additional payments.


Looking at the data by amortization periods, borrowers with amortization periods of 25
years or less were more likely to increase their regular payments or make lump sum
payments. Among borrowers whose original amortization period was more than 25,
about one-fifth (21%) either increased their payment or made a lump sum payment or
both.




Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 29
                                           Table 3-18
                  Shares of Mortgage Holders Who Made Extra Payments
                      During the Past 12 Months, by Length of Original
                                     Amortization Period
                                Increased Amount       Made Lump
         Amortization Period                                           Did Neither
                                    of Payment        Sum Payment
        Up to 25 Years                  18%              14%              74%
        More Than 25 Years              13%              11%              79%
        Including…
           30 years                      9%              11%              81%
           35 years                     14%               9%              81%
           40 years                     18%              13%              73%
        Total                           16%              13%              75%
        Source: Maritz survey for CAAMP, Spring 2010.
        Note: Totals add to more than 100% as some consumers made both additional
        payments.


This snapshot portrays activity during a short period of just 12 months. It seems very
reasonable to assume that over longer periods a high percentage of mortgage borrowers
will take these actions to shorten their repayment periods.

During the past year there have been many expressions of concern about the use of
extended amortization periods. These data show that over time a large share of the
borrowers will use increases in their incomes to expeditiously retire their mortgages.
This should lessen concerns about the riskiness of extended amortizations.


Missing Mortgage Payments

Another new area of questioning in the spring 2010 survey asked mortgage holders if
they have ever missed a mortgage payment. The vast majority (93%) have never
missed a payment, meaning that 7% have missed a payment at some time. This
includes 4% who have missed one or more payments during the past year. The next
two tables portray the results in terms of: periods when the properties were purchased
and, secondly, the original amortization periods. On this metric, the data suggests that
recent purchases and extended amortization periods are no more risky than are prior
purchases and shorter amortization periods.

                                        Table 3-19
           Shares of Mortgage Holders Who Have Missed Mortgage Payments,
                             By Year Property was Purchased
   Period of
                   In Past Year       Previously        Never        Total
   Purchase
   Before 1990          6%               3%              92%         100%
   1990-1999            3%               6%              91%         100%
   2000-2004            7%               2%              91%         100%
   2005-2010            3%               1%              96%         100%
   Total                4%               3%              93%         100%
   Source: Maritz survey for CAAMP, Spring 2010.

Canadian Association of Accredited Mortgage Professionals                       May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                            Page 30
                                         Table 3-20
            Shares of Mortgage Holders Who Have Missed Mortgage Payments,
                              By Original Amortization Period
    Amortization Period     In Past Year   Previously       Never     Total
    Up to 25 Years              5%             2%            93%      100%
    More Than 25 Years          4%             3%            94%      100%
    Including…
       30 years                 4%             2%            94%      100%
       35 years                 4%             3%            93%      100%
       40 years                 2%             3%            95%      100%
    Total                       4%             3%            93%      100%
    Source: Maritz survey for CAAMP, Spring 2010.


Data from the Canadian Bankers Association – which covers 7 major banks – shows
that there has been a rise in mortgage arrears during the recession. Prior to the
recession (during mid-2004 to mid-2008), the arrears rate was very low, with less than
0.30% of mortgages in arrears (for three months or more). During the winter of 2008/09,
however, the arrears rate increased rapidly. The most recent data (as of February 2010)
shows an arrears rate of 0.45%. While the increase is indicative of increased financial
difficulties, it remains lower than was seen during most of the 1990s (when the average
arrears rate was 0.50%).

In the Canadian context, most mortgage defaults are due to reduced ability to pay,
including especially job loss, but also income reductions due to reduced hours or
reduced hourly pay rates. Marital breakdown is also a cause of financial difficulty (this
might usually fit into the category of reduced ability to pay).

The chart to the right illustrates the
importance of changes in the
employment situation. It contrasts
the arrears rates with the Canadian
“employment rate” (not to be
confused with the unemployment
rate – this data shows the
percentage of adults who are
employed). The data shows very
clearly that changes – up or down –
in the employment rate are followed
several months later by changes in
the arrears rate (in the opposite
direction).    The job losses that
occurred during the recent recession can be considered the primary cause of the rise in
mortgage arrears, as a sharp drop in the employment rate was followed several months
later by a rise in the arrears rate.




Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 31
The most recent data shows that the employment rate has stabilized, and the arrears
rate is now close to flat. The future path for arrears will be highly influenced by
economic trends, and particularly by the rate of job creation.


The Role of Rental Income

For the first time, the spring 2010 survey asked mortgage holders “do you currently have
a rental unit (e.g. basement apartment) within your primary residence?” As is indicated
in the table below, a substantial share of mortgage holders have rental units in their
dwellings. Combining the various data from the survey:

•   About 325,000 mortgage holders have rental units from which they currently receive
    rental income.
•   About 150,000 have rental units from which they do not currently receive income.
•   About 5.1 million do not have rental units in their dwellings.

As is shown in the table, rental units are present in roughly equal proportions for all of
the purchase periods. Analysis relative to amortization periods also found that
proportions are similar across the distribution (although no table is shown for this
permutation of the data).

                                         Table 3-21
     Shares of Mortgage Holders Who Have a Rental Unit in their Primary Residence,
                              By Year Property was Purchased
    Period of       Yes - Receive       Yes - No
                                                           No             Total
    Purchase           Income       Current Income
    Before 1990          10%              2%              89%             100%
    1990-1999             8%              2%              91%             100%
    2000-2004             4%              4%              93%             100%
    2005-2010             5%              2%              92%             100%
    Total                 6%              3%              92%             100%
    Source: Maritz survey for CAAMP, Spring 2010.


Further questioning asked “to the best of your knowledge, did you need to include your
rental income in order to qualify for your mortgage on the home? (that is, you might not
have qualified if you did not have the rental income)”. Responses to this question
indicate that there are about 125,000 mortgage holders in Canada who needed rental
income to qualify for their mortgage. Of these, about 50,000 purchased their home
during 2005 to 2010. (These calculations don’t count people who used rental income to
qualify in the past but who no longer have the rental unit and they don’t count those who
are now mortgage-free. Thus, the contribution of rental income to home ownership is
under-stated by the estimates.)

Looking across the regions of Canada, so-called “secondary rental units” are found most
frequently in the Atlantic provinces, British Columbia, and Quebec.



Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 32
                                              Table 3-22
                         Shares of Mortgage Holders Who Have a Rental Unit
                               in their Primary Residence, By Region
                                                                                   British
                      Atlantic   Quebec   Ontario   Manitoba   Sask’n   Alberta              Canada
                                                                                  Columbia
% With Rental Units
Yes, currently receive
income for it             7%        8%        5%      3%        2%       3%         6%         6%
Yes, but not currently
receiving income          4%       2%         2%      0%        6%       2%         5%          3%
No                        88%      90%      92%      97%       93%      95%        89%          92%
Total                    100%     100%      100%     100%      100%     100%       100%        100%
Estimated Number with Rental Units
Yes, currently receive
income for it           29,000 106,000 116,000       5,000     3,000    19,000     45,000    323,000
Yes, but not currently
receiving income        18,000   23,000    51,000      0       8,000    11,000     35,000    146,000
Total                   47,000 129,000 167,000       5,000     11,000   30,000     80,000    469,000
Source: Maritz survey for CAAMP, Spring 2010.


      “Secondary rental units” play an important role in the Canadian housing system, by
      increasing access to home ownership and, as a further consequence, expanding the
      supply of affordable rental housing.




      Canadian Association of Accredited Mortgage Professionals                     May 2010
      “Prudence Paying Off for Canadian Mortgage Borrowers”                          Page 33
4.0    Rising Interest Rates Will Bring Challenges

There are widespread expectations that interest rates will rise in Canada during the
coming years, and by substantial amounts. The expectations have been clearly
expressed by senior government officials and the economics profession. The spring
2010 CAAMP/Maritz survey shows that most consumers share those expectations.

Rising interest rates will result in increased costs for mortgage holders. There have
been many expressions of concern that consumers may not be prepared for the
increased interest burdens.

The CAAMP/Maritz survey has attempted to generate data to assess vulnerabilities.
This section discusses the data, and finds that there are potentially large numbers of
Canadians who will have difficulty with increased costs.

Then, several key caveats are explored, which suggest that the increased difficulties will
be less severe than is indicated by the first pass through the data.

A third sub-section reprises findings from CAAMP’s January 2010 research report, which
found that during 2009 a vast majority of home buyers gave themselves room to
accommodate rises in interest rates.

The conclusion reached is that Canadian mortgage holders will face difficulties as and
when their mortgage costs rise, but the extent of the difficulties will be limited.


The Survey Shows Vulnerabilities

Canadians were very generous in providing detailed data for this study, and that data
supports complex analysis of mortgage characteristics.

• The data includes current interest rates and mortgage principals. This allows us to
  calculate the cost increases that would result at varying interest rates. In the analysis
  that follows, it is assumed that mortgage interest rates will rise to 5.25% (for all types
  and terms of mortgages). This would be a very substantial rise compared to current
  rates for variable rate mortgages (which, at the time of writing in late April 2010 are
  typically in a range of 1.75% to 2.25%). The increase would be less substantial for
  longer-term mortgages (which are currently in the range of 4.4% to 4.65%). The
  assumption about interest rate increases is consistent with recent interest rate
  forecasts from the major banks.
• The survey data also includes mortgage borrowers’ opinions on how much of an
  increase in payment they could tolerate before they are unable to make their
  payments.
• Combining the two sets of data – potential cost increases from rising interest rates
  and consumers’ abilities to tolerate increases – enables us to estimate the
  percentage of mortgage borrowers who will encounter difficulties if and when their
  interest rates change to 5.25%.


Canadian Association of Accredited Mortgage Professionals                        May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                             Page 34
The table below summarizes the results, with the population divided into groups
depending on dates when the properties were purchased. Major findings include:

• Firstly, not all consumers will face increased interest rates. About 18% of mortgage
  holders (about 1,000,000 households) currently have interest rates greater than
  5.25%. They may see their payments fall in future.
• The remainder (about 4.5 million mortgage holders) face increased interest costs.
  (But, as is discussed in the Caveats section, this does not necessarily mean that their
  actual costs will increase, or at least not by the full amount that is estimated.)
• Of the 4.5 million, for 3.7 million the increases are within their tolerances.
• This leaves about 850,000 mortgage borrowers who either indicate that they are
  already having trouble making their payment (about 375,000) or who may see cost
  increases that will exceed their tolerance (about 475,000).
• Most of the difficulties would be faced by borrowers who purchased their properties
  during the past half decade. However, this is mainly because most mortgage holders
  made their purchases in recent times: the incidence of difficulty (combining those who
  already have difficulty with those who may exceed their tolerances) for recent
  purchasers is not very different than it is for those who bought earlier.

                                            Table 4-1
               Anticipated Impacts on Mortgage Holders of 5.25% Interest Rates,
                               By Year Property was Purchased
                                                       Year of Purchase
Estimated Impact
                               Before 1990 1990-1999        2000-2004     2005-2010       Total
% Affected
Likely Reduced Cost                13%           18%            18%          19%          18%
Unlikely to Exceed Tolerance       74%           71%            70%          64%          67%
Already an Issue                   10%            7%             6%           6%           7%
May Exceed Tolerance                3%            4%             6%          12%           9%
Total                             100%          100%           100%         100%          100%
Number Affected
Likely Reduced Cost               50,000       175,000        225,000      525,000     1,000,000
Unlikely to Exceed Tolerance     350,000       650,000        925,000     1,800,000    3,725,000
Already an Issue                  50,000        75,000         75,000      150,000      375,000
May Exceed Tolerance                 0          25,000         75,000      325,000      475,000
Total                            475,000       925,000       1,325,000    2,825,000    5,575,000
Source: Maritz survey for CAAMP, Spring 2010.
Note: estimates are rounded to the nearest 25,000 and totals may not add due to rounding.

Three Caveats

The survey data provides us with good reason to believe that the fall-out from rising
interest rates will be less severe than is suggested in the estimates above:

• Firstly, as was discussed above, substantial shares of mortgage borrowers have
  increased their regular payment beyond the required amount or made lump sum
  payments. These payments reduce their potential amortization periods to less than
  the contracted periods. It means that if interest costs increase to unaffordable levels,
  the borrowers can often reduce their payments (within the limits imposed by the
  contracted amortization period). An attempt was made to use the survey data to

Canadian Association of Accredited Mortgage Professionals                          May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                               Page 35
    calculate what each borrower’s current payments should be versus what it actually is.
    The estimates suggest that about 40% of mortgage borrowers are paying $100 or
    more per month more than they are obliged to. This further supports the idea that
    borrowers have some capacity to reduce their payments if they are overly challenged
    by increased interest rates.
  • Secondly, consumers’ assessments of their ability to handle cost increases are based
    on their current conditions, but the cost increases will occur in future. Most of the
    borrowers will see income increases (cost of living adjustments, and often real
    income gains due to career progression). Their ability to absorb a future cost
    increase should be greater than their current ability. Most borrowers have fixed rate
    mortgages and generally with long terms: the cost increases may not occur for
    several years. A minority of borrowers – especially those with variable rate
    mortgages – will face earlier increases.
  • Thirdly, most of the home owners with mortgages have substantial amounts of
    housing equity: most of those who might face unaffordable increases in mortgage
    costs could solve their problems by selling their properties. The table below provides
    estimates of housing equity, segmented by the impacts of future interest costs. As is
    indicated, even among households who may be unable to afford their future mortgage
    costs (the second last column of data), more than 90% have $20,000 or more in
    home equity and 70% have more than $50,000 in equity. There are less than 50,000
    mortgage holders who may face future payment difficulties and have less than
    $20,000 in housing equity. The findings are similar for households that already have
    difficulty affording their mortgage payments (the middle column of data).

                                            Table 4-2
                              Housing Equity for Mortgage Holders,
                          by Anticipated Impacts of 5.25% Interest Rates
                                           Unlikely to                        May
                       Likely Reduced                       Already an
                                             Exceed                          Exceed         Total
                             Cost                              Issue
                                            Tolerance                       Tolerance
% with
  Negative equity               1%                1%               2%           1%            1%
  $0-9,999                     6%                 1%               0%           4%            2%
  $10,000-19,999               5%                2%               3%            4%            3%
  $20,000-29,999               4%                3%               7%            9%            4%
  $30,000-49,999               20%               9%               9%           13%           11%
  $50,000-99,999               21%               21%              33%          23%           22%
  $100,000 or more             44%               63%              44%          47%           56%
Total                         100%              100%             100%         100%          100%
# of Households
  Negative equity                0              25,000              0            0          50,000
  $0-9,999                    50,000            25,000              0         25,000       120,000
  $10,000-19,999             50,000             75,000           25,000       25,000       170,000
  $20,000-29,999             50,000            100,000           25,000       50,000       250,000
  $30,000-49,999             200,000           325,000          25,000        50,000       630,000
  $50,000-99,999             200,000           800,000          125,000      100,000      1,220,000
  $100,000 or more           425,000          2,350,000         175,000      225,000      3,120,000
Total                      1,000,000          3,725,000         375,000      475,000      5,560,000
Source: Maritz survey for CAAMP, Spring 2010.
Note: estimates are rounded to the nearest 25,000 and totals may not add due to rounding; totals may
differ from figures shown elsewhere due to adjustments for incomplete data.

  Canadian Association of Accredited Mortgage Professionals                             May 2010
  “Prudence Paying Off for Canadian Mortgage Borrowers”                                  Page 36
Earlier Findings

In a January 2010 report “Revisiting the Canadian Mortgage Market – Risk is Small and
Contained” CAAMP assessed risks taken by recent home buyers. Using a database of
40,000 mortgage transactions (for home purchase) that had occurred during January to
November 2009, it assessed the ability of borrowers to handle an increase in mortgage
rates to 5.25%. The simulations found that the vast majority of the borrowers had left
themselves ample room: the average gross debt service ratio (“GDS”) was 21.8%, well
within the 30% to 35% limits used by mortgage lenders and the average total debt
service ratio (“TDS”) was 32.3%, again well below the 42% to 44% limits used by
lenders. The study developed simulations that took into account time horizons to
renewals and incorporated modest rates of income growth. The simulation indicated
that GDS ratios would rise for 41% of the borrowers, but would fall or be unchanged for
59%, and the average GDS ratio would be virtually unchanged.

For borrowers with fixed rate mortgages, payment increases would be moderate and
income gains would generally match the cost increases.

There would be more risk for those with variable rate mortgages. But that risk would be
limited: the January 2010 study estimated that among first-time buyers who purchased in
2009 and took variable rate mortgages, about 4,000 to 10,000 might encounter payment
difficulties if their interest rates increased to 5.25%. In the context of the Canadian
housing market, these are very small numbers.


Conclusions

Recent experience in the United States confirms that there is considerable risk in the
mortgage market related to unaffordable increases in costs (usually the consequence
rising market interest rates).

Interest rates have been remarkably low for some time and have encouraged a high
volume of home-buying. It is reasonable to argue that interest rates will inevitably rise
and mortgage costs will correspondingly adjust upwards.           (There is of course
considerable uncertainty about the timing and magnitude of the increases.).

Correspondingly, it is reasonable and responsible to ask whether there are undue risks
in the mortgage market.

During the past two years, there has been a great deal of discussion of these questions.
Unfortunately, there is very limited data in Canada on mortgage characteristics, and in
consequence, much of the discussion has been speculative, rather than definitive or
reliable. CAAMP has attempted to contribute to the discussions through the generation
of original data and analysis.

The data that is available leads to a conclusion that a very large majority of Canadian
mortgage borrowers have acted prudently within a challenging housing market.



Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 37
5.0    Outlook for the Housing and Mortgage Markets

The Economic Background

The Great Recession of 2008/09 turned out to be relatively mild, at least in Canada.

This analyst prefers to characterize
economic conditions using the
percentage of the (adult) population
that    is   employed      (or   the
“employment rate”). The data shows
that in Canada this recession was
less severe than the two prior
recessions:     this    time     the
employment rate fell by about 2.5
percentage points; in the two prior
recessions the drops were about 4.5
percentage points. This recession
also had a short duration in Canada
– about nine months.

Since mid-2009, the employment rate has been essentially stable, which means that
employment is expanding by about the same rate as the population. In a recovery, we
hope to see employment growing more rapidly than the population, which would cause
the employment rate to rise (and the unemployment rate would fall). To this point,
therefore, the rate of recovery is just moderate, but it is still early days.


Housing Market Impacts

Prior to the recession, Canada
experienced a decade of robust job
creation: as can be seen above the
employment rate rose strongly.
During 2007 and 2008 the rate was
at the highest ever recorded. Job
creation is the key driver of housing
demand. But, job creation does not
lead instantly to housing demand –
people need time to prepare to buy
homes. The consequence was that
as the economy strengthened,
housing       demand         gradually
strengthened. In the resale housing
arena, new annual sales records were set every year from 2001 to 2007. During 2008,
however, the economy began to weaken and then in the fall, recession hit. A sudden
collapse of confidence caused sales to fall very sharply late in 2008. Before long (during
the spring of 2009) confidence began to recover and so did housing demand. By late
2009, resale activity had returned to peak levels.
The recession caused a short-lived
drop in housing values, but the
return of strong demand caused
values to bounce back, and more.
As of March 2010, the average
resale price in Canada is 17%
higher than a year earlier. This
comparison is misleading, however,
since prices were temporarily
depressed a year ago. A more
useful comparison is with two years
ago: over that period the increase is
7.6%, or about 3.7% per year. The
most recent data suggests that
prices have been flat since last fall.

During the period of economic
expansion,     a   combination     of
increasing sales and rapidly rising
values resulted in a sharp
expansion of the dollar volume of
sales. Conversely the slowdown
during 2008 resulted in a sharp drop
in the dollar volume of sales. The
recovery of sales and values during
2009 resulted in a substantial
recovery of the dollar volume. The
2009 figure of almost $150 billion is
roughly triple the annual figures
seen during the 1990s.

Recent sales activity (and price growth) has been much stronger than we might expect
in a recessionary environment. That strength can be attributed to several temporary
factors:

•   Demand generated by jobs that were created prior to the recession. Given the
    weakened economy over the past year and a half, this effect will soon wane.
•   Record low interest rates. In general, changes in housing affordability are much less
    important than job creation. However, there have been widespread expectations that
    interest rates cannot stay at record lows for very long, and many buyers have been
    motivated to buy before rates increase. This may have pulled some demand forward
    in time. Mortgage rates started to rise at the end of March and this may be causing a
    last burst of demand as buyers take advantage of pre-approved mortgages at low
    rates.
•   More recently, tightened mortgage lending criteria (which took effect during April)
    have also caused some demand to be pulled forward in time.



Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 39
The recent moderate rate of job creation will generate future demand, but that demand
will feed into the housing market only gradually, and the amount of demand that is
generated by moderate job creation should be substantially less than was seen prior to
the recession. Overall, it appears highly likely that housing activity will slow during the
coming months, and remain relatively weak into 2011.

Concerning new construction of
houses and apartments, starts
respond less rapidly to changing
economic conditions, because of the
lag times that result from the need
to pre-sale new units and then
initiate the construction process.
Housing starts began to slow late in
2008. More recently, housing starts
improved considerably during the
final quarter of 2009 and the first
quarter of 2010. Total starts in 2009
were 29% lower than in 2008.


Housing Market Forecasts

This author and other forecasters suggest that the recent rebound in housing demand
will soon be reversed, and demand is expected to remain constrained into 2011.

Forecasts shown here are taken from a survey of recent forecasts published by
Canada’s five largest banks as well as Canada Mortgage and Housing Corporation
(“CMHC”) and the Canadian Real Estate Association (“CREA”).

Concerning resale markets:

• The averages of the forecasts from CREA8 and CMHC9 are for 507,000 sales in 2010
  and 480,000 in 2011.
• For prices, the average forecasts are $339,000 for 2010 and $339,500 for 2011.
• Combining the forecasts for sales and prices, sales volumes are forecast at $172
  billion for 2010 and $163 billion for 2011.

Concerning housing starts:

• The averages of the forecasts from CMHC and the five banks are 182,000 starts for
  2010 and 179,000 starts for 2011.

These forecasts imply that during the remainder of this year housing activity will weaken
from recent levels. During the first quarter of 2010:



8
    CREA’s forecast is dated February 8, 2010.
9
    CMHC’s forecasts were released on March 2, 2010.
Canadian Association of Accredited Mortgage Professionals                       May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                            Page 40
• Resale activity was at an annualized rate of 520,000 (higher than the full year
  forecast).
• The average price was about $341,900 (also higher than the full year forecast).
• Housing starts were at an annualized rate of 198,900 (again, higher than the full year
  forecast).

These forecasts, and the implied changes for the remainder of the year, are well within
the realm of possibility: as has been discussed above, housing activity has recently been
boosted by temporary factors that can reasonably be expected to wane.


Implications for Mortgage Lending

Expanding housing activity has
resulted in rapid growth in the
residential mortgage market during
this decade, as is illustrated in the
chart to the right. At the beginning
of    the     decade,     outstanding
residential     mortgage        credit
amounted to $421 billion. Growth
was modest in the early years of the
decade, but accelerated in the
second half. By the end of 2009, the
volume had more than doubled, to
$964 billion. This amounts to a very
robust average annual growth rate
of 8.6%.

Another perspective looks at the
annual growth of the mortgage
market. Growth peaked in 2007 at
$90 billion, a 12.4% increase.
Similar rates of growth were
sustained    during   early     2008.
However, as the volume of resale
market activity slowed during the
recession the mortgage market
rapidly decelerated. For all of 2009,
the growth rate was 6.7% (with a
$60 billion expansion during the
year).

Rebounding housing activity (increased resale volumes and housing starts) has caused
mortgage activity to recover. For 2010, growth of credit outstanding is forecast at just
over $80 billion (8.5%) with a further expansion to over $90 billion in 2011 (8.7%).




Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 41
The total volume of the residential mortgage market would pass the $1 trillion mark
about the middle of 2010 and by the end of 2010 would be in the range of $1.04 trillion.
For the end of 2011 the forecast is $1.13 to $1.14 trillion.

Another perspective on the mortgage market looks at the volume of new approvals. This
category includes new mortgages plus mortgages that are transferred from one lender to
another and mortgages that are refinanced. In consequence, the volumes of annual
approvals are larger than was shown earlier for the growth rate of total mortgage credit.
For example, the data on approvals
shows total approvals of $216 billion
for 2008 (approvals data for all of
2009 is not yet available), while the
data on total residential mortgage
credit shows growth of about $84
billion. The chart to the right shows
that mortgage approval activity was
relatively flat during the 1990s and
has increased sharply during the
past decade. Total approvals for
2008 ($216 billion) were almost
triple the volumes seen during 1997
to 2000 (about $75 billion).

Looking forward, the resurgence of housing activity should cause approval volumes to
expand in 2010, with the forecast at $225 to $230 billion. For 2011, softer housing
demand may cause approvals to be slightly lower ($215 to $220 billion).




Canadian Association of Accredited Mortgage Professionals                      May 2010
“Prudence Paying Off for Canadian Mortgage Borrowers”                           Page 42
Canadian Association of Accredited Mortgage Professionals
2235 Sheppard Ave. E., Suite 1401, Atria II, Toronto, ON M2J 5B5
www.caamp.org