Millennials think that mortgage interest rates are too high, according to the Manulife Bank Homeowner Debt Survey, the second one released this year. This fall’s survey compared the money management insights of three generations of homeowners: Millennials (aged 20-34), Generation X (aged 35-51), and Baby Boomers (aged 52-69).
Compared to the 36 cent of Millennial homeowners who feel that mortgage interest rates are too high, only 11 per cent of Baby Boomers, who were more likely to have bought their homes when prime mortgage interest rates ranged from 8.75 to 22.75 per cent
, feel the same way.
“The survey results may be more reflective of monthly mortgage costs - which are a function of debt and interest rates,” said Philip Petursson, chief investment strategist at Manulife Investments. “Perhaps the emphasis is misplaced on interest rates, given the fact that interest rates are at decade lows, as opposed to the real driver of higher mortgage costs, which is housing prices.”
If Millennials truly think that their mortgage interest rates are too high in this era of record low interest rates, perhaps that's an indication that these new low rates have been normalized, a symptom of the "lower for longer"
period that Stephen S. Poloz addressed in a speech he made in September.
“Manulife Bank’s survey adds to the evidence that low interest rates and rising house prices in some key cities are permeating the consumer psyche,” said Frances Donald, senior economist, Manulife Asset Management.
The average chartered bank posted five-year
fixed mortgage rate was at 4.64 per cent in June 2016, a 40-year low, according to Statistics Canada. By comparison, the rate was 21.75 per cent in September 1981.
Overall, a third of mortgage holders surveyed say they could manage a mortgage payment increase of up to 10 per cent without encountering any financial difficulty and about 40 per cent could manage an increase of 20 per cent or more. Given the recently implemented mortgage stress tests for any future home buyers, it’s safe to assume that officials would like to see those percentages even higher. Conversely, one in six respondents would encounter financial difficulty with any increase to their mortgage payment.
According to Manulife Bank, a homeowner with a mortgage balance of $174,000, an interest rate of 2.89 per cent and a 20-year
amortization period would have monthly payments of $954. For payments to increase 10 per cent to $1,049 per month, the interest rate would need to increase by just over one per cent.
On average, Canadian homeowners with a mortgage reported $174,000 in mortgage debt, and more than one quarter of their net income goes towards making mortgage payments. However, almost three in 10 homeowners spend more than 30 per cent of their net income on mortgage payments – 36 per cent of those are Millennials, but 32 per cent of those belong to Generation X. The average price of a Canadian home in July was $480,742 according to the Canadian Real Estate Association.
Other survey results indicated that nearly half of Canadian homeowners aren't prepared for emergency expenses. About half of survey responders have $1,000 or less in an emergency fund, or don't know how much they have set aside. Millennials have $3,500, the lowest median amount of emergency funds among the respondents.
“A financial buffer is an important part of a financial plan,” said Rick Lunny, President and chief executive officer of Manulife Bank of Canada. “A high-interest savings account is a good option. Or, if you’ve got a home equity line of credit, you could use your savings to reduce your debt and save interest - and still have access to that money if an emergency arises.”
Although many Millennial homeowners don’t have a lot money in the bank, there is evidence to suggest that even if they did, they might not use it as expected. Thirty-one per cent of Millennial respondents felt it’s not a “big deal” if they carry a balance on their credit cards. By comparison, only 24 per cent of Generation X respondents and 21 per cent of Baby Boomers felt the same way.
“It’s undoubtedly stressful living paycheque-to-paycheque,” said Lunny. “If you don’t have extra cash at the end of the month, it’s very difficult to build a rainy-day account. For those who find themselves in this situation – a good place to start is working with an advisor to create a budget. Many people are surprised at how much of their money is going toward things that they don’t consider that important.”
More than one third of mortgage holders overall would have difficulty making their regular mortgage payments within a few months if the main household earner lost his/her job, which may be a contributing factor was to why Millennials think that mortgage interest rates are to blame. In addition, almost four in 10 Millennials indicated their home needed repairs that they couldn’t afford, higher than Generation X and Baby Boomers.
Homeowners don’t feel that the saving woes end as they get older, either: the largest source of stress for members of Generation X is their inability to save for retirement. Four in 10 Baby Boomers expect home equity to make up more than 60 per cent of their household’s wealth when they retire and may need to access it in order to meet their retirement income goals and stay in their homes. Members of Generation X and Baby Boomers may be under less pressure from their mortgage (24 per cent of Gen X respondents and 57 per cent of Baby Boomers have no mortgage debt, compared to 17 per cent of Millennials surveyed), but they’re not resting easy. About two out of three respondents from Generation X weren’t confident that they could continue to maintain their lifestyle in retirement, and the top source of stress for Generation X respondents was not being able to save as much money as they’d like to as they continue to age. Survey results indicated the vast majority of Baby Boomers – 79 per cent – would like to stay in their current home during retirement, but that they need the equity in their home to make that a reality. Almost a quarter of them indicate their home will represent more than 80 per cent of their wealth when they retire, and a further 18 per cent say it will represent between 61 and 80 per cent of their wealth.
The Manulife Bank of Canada poll surveyed 2,372 Canadian homeowners in all provinces between ages 20 to 69 with household income of $50,000 or more. The survey was conducted online by Environics Research between June 28 and July 8, 2016. National results were weighted by province, income and age.
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