The bad news is that only 43 per cent of Canadian homeowners say they are happy with the way they've managed their debt and day-to-day finances during the last year, according to a survey by Manulife Bank of Canada. One in three homeowners say they are "very unhappy" with the way they've managed debt.
The good news? "Canadians have a culture of repaying debt promptly," says Will Dunning in the latest Annual State of the Residential Mortgage Market in Canada report for the Canadian Association of Accredited Mortgage Professionals (CAAMP).
Much has been made in the media about the amount of debt that Canadians have been racking up while rates have been low, but the two studies show that borrowers are aware the low rates won't last forever and most are doing their best to reduce their debt as soon as possible.
Dunning says recent homebuyers "are more likely to take steps to shorten amortization periods than are prior purchasers (to increase their payments, make lump sum payments or increase the frequency of mortgage payments)."
About one in six mortgage holders voluntarily increased their regular mortgage payments during the past year, says the CAAMP report. About 17 per cent of mortgage holders made lump sump payments, and eight per cent increased the frequency of payments. That means that 38 per cent of mortgage holders, or 2.1 million out of an estimated 5.58 million mortgage holders in Canada, took one or more measures to accelerate repayment.
The Manulife survey says that more than three-quarters of homeowners say being debt-free is one of their top financial priorities.
"Debt is a tool that Canadians can use to improve their standard of living and purchase assets over the long term," says Doug Conick, president and CEO of Manulife Bank of Canada. "Still, people need a strategy to manage debt. The key is to determine what your financial priorities are - and then put a plan in place to focus your most important goals."
Consumers have realized that an important first step in managing debt is by tackling high-interest credit card charges. Two-thirds of Manulife survey respondents say they always pay off their credit card balance in full. That's a nine-per-cent increase from a similar survey conducted two years ago. Among the other third who carry a balance, most of them say they plan to pay it off in full in the coming year.
"Interestingly, this finding is very similar to that from the 2011 survey - suggesting that good intentions may not always translate into action," says Manulife.
Other strategies for paying down debt include "making extra payments on my debts" (suggested by 61 per cent of respondents) and creating a written budget to track and manage spending, mentioned by 43 per cent of those homeowners surveyed. For those who are concerned about higher mortgage interest rates when it comes time to renew, the CAAMP report has some reassuring news.
"During the next year, renewal of mortgages is likely to result in reduced interest costs; it will be a positive factor for these borrowers and therefore for the broad economy. Farther out, the outcomes are likely to be closer to neutral," says Dunning in the CAAMP report.
The report found that mortgage rate discounting is widespread and is saving consumers a lot of money. For mortgages that were initiated or renewed in 2013 with five-year, fixed terms, the average mortgage interest rate is 3.06 per cent, says CAAMP. The average posted rate was 5.21 per cent, so the negotiated mortgage rate discount averaged 2.15 percentage points.
While most people are concentrating on paying off their mortgages, about 11 per cent of homeowners took equity out of their home in the past year. The average amount taken out was $57,000. The most common use for the money was debt consolidation, followed by investments, renovation and home repair and purchases, including education.
CAAMP says on average, home equity in Canada is equivalent to 66 per cent of the value of the homes. Among homeowners who have a mortgage but not a home equity line of credit (HELOC), the average home equity is 46 per cent. For homeowners with both a mortgage and a HELOC, it's 43 per cent.
Eighty-three per cent of homeowners (about 7.9 million out of 9.52 million) have 25 per cent or more equity in their homes, says CAAMP. Both surveys show that Canadians worry about debt. CAAMP says that more than 70 per cent of those surveyed agree with the statement that "low interest rates have meant that a lot of Canadians became homeowners over the past few years who probably should not be homeowners."
Dunning says: "However, while consumers believe other people have been irresponsible, the responses to other questions show that they believe their own behaviour has been responsible…It is likely that beliefs about other people are shaped by messages in the media and from pundits."
Manulife says only one in three homeowners have consolidated debt at a single low rate, and one in four get advice from a financial adviser. The company says that 80 per cent of homeowners who work with an adviser pay their credit card balance in full each month, compared to 64 per cent who don't seek advice.
"For anyone who struggles to find time to spend on debt management or who could benefit from objective, professional advice, it's certainly worthwhile to seek out a financial adviser," says Conick. "It never hurts to learn about the strategies and tools that work for others - and getting personalized advice could help you remain focused on your goal of becoming debt-free."