Canadian borrowers show the fastest pace of mortgage payoffs due to low interest rates

While some regions of Canada face extremely high real estate prices, historically low interest rates are helping borrowers pay off their mortgages faster than they ever could.

According to Edge Realty Analytics, on average, 61% of a new homebuyer’s first mortgage payment goes towards principal repayment.

At the beginning of 2000s, the number was 26.5%, and a more significant changes can be seen if we compare it to 11.9% reported in the 1990s, or to 4.6% reported in the 1980s.

As a result, borrowers are able to build-up equity in their properties much faster, as the interest rates are extremely low.

“Homeownership is in some way a very aggressive forced saving program,” – Mortgage Professionals Canada says in its annual report. “Even without considering the influence of price increases, the housing equity is built very quickly,” – the report noted. “This incredible ‘net affordability’ explains why homebuying activity is still so strong in Canada and why most Canadians consider homeownership financially more profitable than renting, even despite the sharp housing prices growth and a burden of mortgage payments.”

In addition to helping borrowers pay off their mortgages faster, low interest rates also keep housing moderately affordable in spite of the 38.4% rise in average real estate price over the previous 12 months.

However, rates will not remain so low forever. The central bank has made it quite clear that it plans to start raising rates by late next year.

No one can say for sure how much rates will increase during the Bank of Canada’s next cycle. Nevertheless, markets are pricing in at least 8 increases by 0.25% each over the next 5 years. As a result, the BoC’s key lending rate may go up from today’s 0.25% to 2.25%.

According to St-Arnaud, even a smaller gain by 1-1.50% will push home prices into a new valuation territory, making the current somewhat “affordable” real estate market fully unaffordable for most Canadians.

“Based on our simulations, we can say that many Canadian cities will face strong issues with housing affordability as interest rates go up,” – he noted. “A 1.50% increase in mortgage rates may be enough to cause significant difficulties for certain housing markets and home prices.”