Many of us unprepared if rates jump, survey finds

Canada’s millennials, baby boomers stand to be hardest hit by ‘unexpected expenses’

The average mortgage debt in the country rose 11 per cent during the past year to more than $200,000 even as 52 per cent of Canadians say they lack the financial flexibility to quickly adjust to a change in costs, according to a new survey.

Manulife Bank’s annual homeowner debt survey published Tuesday paints a grim picture of consumers who may not be ready for the next increase in interest rates that could be coming.

“The survey shows that a large percentage of Canadians are not prepared for unexpected expenses,” said Rick Lunny, chief executive of the bank. “It’s interesting because it affects two segments — the millennial segment as well as the baby boomer segment.”

Rising home prices have made it harder and harder for millennials to break into the market. The average price of a home across the country rose 10 per cent in April from a year ago to $559,317.

“The millennial segment owes more than any previous generation and are not prepared to meet unexpected expenses. They’re homeowners, their furnace could go, they could need a new transmission on their car,” said Lunny.

The average millennial debt was $223,000, but 29 per cent of that segment of the population owes more than $250,000 and just 14 per cent of the population has no debt. By contrast, the average baby boomer debt was $180,000, but 61 per cent had no debt at all.

“Baby boomers lack financial flexibility in a different way in that a majority of their net worth is tied up in their homes. As they advance in years, they might not have the financial flexibility to meet their ongoing expenses,” said Lunny.

The survey found 41 per cent of baby boomers said home equity accounted for more than 60 per cent of their household wealth, and 21 per cent said it makes up more than 80 per cent. It said the average mortgage debt now stands at $201,000, an 11 per cent jump from a year ago.

Some of that debt could be attributable to parents dipping into their home equity to help children buy a property. The Manulife survey found 45 per cent of millennials reported they had received a financial gift or loan from their family when buying a house, which compares with 37 per cent of generation Xers and 31 per cent of baby boomers.

“It wasn’t part of our survey question,” said Lunny, about whether boomers were taking on debt to help their children buy a home.

“What’s interesting is sure these millennials have gotten help from their parents to buy home, but they still owe an awful lot of money and they are not prepared if the cost of the mortgage went up 10 per cent.”

The survey found 70 per cent of mortgage holders are not able to handle that 10 per cent increase in mortgage payments.

Ottawa changed the rules last year to force consumers with loans backed by the federal government to qualify based on a five-year fixed posted rate, now 4.64 per cent, and, while technically those homeowners may be able to afford a rate that high, they are oblivious to what it will mean to their budgets.

The survey was conducted from Feb. 1 to Feb. 14 by Nielsen on behalf of Manulife Bank. The results are based on interviews with 2,098 Canadians aged 20-69 with household income of $50,000 or more.