Special Report: Toronto’s twenty-year housing boom has resulted in a negative side effect that homeowners are starting to feel – very high debt levels.
In a special report released today by our brokerage Realosophy Realty in partnership with Teranet, we have found that over the past two years, the percentage of mortgage transactions on properties that are being refinanced has risen from 12% in Q2-2016 to 20% in Q2-2018, a 67% increase.
More and more home owners are turning to higher interest private debt.
With interest rates rising more and more owners are struggling to make ends meet and to keep up with their high debt payments. In the past, homeowners that were accumulating high interest debt (credit cards, etc.) could easily bundle that debt into their mortgage every few years because house values were rising and qualifying for a mortgage was relatively easy.
Things have changed over the past two years. House values are no longer rising rapidly in the GTA and the mortgage stress test introduced by the Office of the Superintendent of Financial Institutions (OSFI) has made it much harder to qualify for a mortgage.
Many buyers looking to take on additional debt when refinancing their home (to consolidate debt or to finance a renovation) are having a hard time qualifying with traditional banks under the new stress tests. As a result, owners are turning to private lenders to fill this gap.
Private lenders serve as the lender of last resort for most home buyers and owners. People who don’t qualify under a traditional bank’s strict lending guidelines can borrow money from the private market where the stress tests don’t apply. The one problem with borrowing from private lenders is that the interest rates they charge are much higher than traditional banks – interest rates can range from 7-20% depending on the property and the borrower.
So, who are all of these homeowners turning to private lenders? Do they resemble the sub-prime owners in the US who had poor credit and no income? Not at all, according to a panel of mortgage brokers specializing in private lending who spoke at a housing conference I recently attended.
They described home owners with great credit and fantastic jobs who are simply living beyond their means. Owners who accumulate debt each year because of countless expenses they hadn’t budgeted for that they can’t say no to (like house repairs, surgery for the dog, and hockey lessons for the kids who suddenly want to play).
Unfortunately, there are two problems with this trend. Firstly, interest rates are only expected to rise over the next couple of years which means people who are having a hard time making ends meet today are going to have an even harder time a year from now.
The other problem is that the amount of money people can pull out of their home to finance their lifestyle is finite – especially in a market where house prices are not rising rapidly. Eventually, that well will run dry and owners will have no choice but to sell their house.
Homeowners struggling to make ends meet today need a plan that does not include turning to high interest private debt. In this late stage of Canada’s housing and credit cycle where house prices are moderating and interest rates are rising it’s not the time to be increasing your overall debt load - it’s time to deleverage.
John Pasalis is the President and Broker of Realosophy Realty Inc. Brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way.
Follow John on Twitter @johnpasalis