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Mortgage debt is a financial risk

Mortgage debt is a financial risk

September 26, 2021

Excessive mortgage debt is a financial risk for many homeowners, writes Peter Watson.

The nagging issue of excessive mortgage debt held by Canadians continues. There is new information that the risk of excess borrowing is getting worse.

This has significant implications for homeowners that might get caught carrying too much debt. Also, there is considerable risk to the Canadian economy if this excess debt contributes to a housing bubble bursts.

More Canadians are mortgaging their house. During the second quarter the number of home loans increased by 60 per cent from the previous year. This was the largest gain on record.

Plus, the size of mortgages increased. The average loan amount was up 20 per cent from the previous year, according to Equifax.

The housing mortgage risk is a result of the “perfect storm”.

The pandemic altered the way we live. Many adults started to work at home, many children transitioned to at-home learning and suddenly families wanted a larger and or more suitable house.

Add in these historic low mortgage rates and suddenly a more expensive house was more affordable. Demand and the price of houses went through the roof.

That is the state of the current real estate market. The question is what might happen in the future.

A key to a stable real estate market is low interest rates. If rates start to increase, suddenly affordability will become an issue. Some families will struggle with increased mortgage payments.

Interest rates rise and fall in part by actions of the Bank of Canada. If the bank wants to slow down economic activity, that can be done by increasing interest rates.

Last week, on September 8, 2021, the Bank of Canada announced there would be no change to the underlying interest rates. My thought is it is just a matter of time before interest rates will rise.

Excessive mortgage debt continues to be a financial risk for many Canadians.

Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through