The Debt Truth: Unexpected Expenses Could Spell Big Trouble for Millennial Homeowners

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Mortgage debt increased by 11%1 to $201,000 last year and more than half (52%) of Canadian mortgage holders lack the financial flexibility to quickly adjust to unexpected costs, per a new Manulife Bank of Canada survey. This despite 78% of Canadians having made debt freedom a top priority.

The problem is most acute among Millennials, who saw their mortgage debt rise more than any other generation. Millennials are also most likely to have difficulty making a mortgage payment in the event of an emergency or if the primary earner in the household were to become unemployed.

“The truth about debt in Canada is that many homeowners are not prepared to adjust to rising interest rates, unforeseen expenses or interruption in their income,” says Rick Lunny, President and Chief Executive Office, Manulife Bank of Canada. “However, building flexibility into how they structure their debt can help ease the burden.”

Overall, nearly one quarter (24%) of Canadian homeowners reported they have been caught short in paying bills in the last 12 months. The survey also revealed that 70% of mortgage holders are not able to manage a ten% increase in their payments. Half (51%) have $5,000 or less set aside to deal with a financial emergency while one fifth have nothing.

1 The percentage change in average mortgage debt controlled for regional, age and income differences between the samples. However, different research providers were used for each wave of the study which may impact trended results.

Millennials not alone

Despite generally having more equity in their homes, many Baby Boomers face the same challenges as Millennial homeowners. Some 41% of Baby Boomers said that home equity accounted for more than 60% of their household wealth and for one in five (21%) it makes up more than 80%.

This indicates Boomers may need to rely on the sale of their primary residence to fund retirement, since much of their household wealth is wrapped up in home equity. However, more than three quarters (77%) of Baby Boomer respondents want to remain in their current homes when they retire.

“Many Boomers approaching retirement share the same lack of financial flexibility as Millennials,” said Lunny. “They want to remain in their current homes, but their home makes up a big part of their net worth. Instead of downsizing, or even selling and renting, homeowners in this situation could consider using a flexible mortgage to access their home equity to supplement their retirement income.”

Helped into the housing market

Almost half (45%) of Millennial homeowners reported that they received a financial gift or loan from their family when purchasing their first home. By comparison, just 37% of Generation X and 31% of Baby Boomers received help from family members when they purchased their first home. Conversely,  almost two in five (39%) Boomers, many of whom are the parents of Millennials, still have mortgage debt.

The generational increase in new homeowners requiring family support comes despite a long-term trend toward two-income households. The number of Canadian families with two employed parents has doubled in the last 40 years, but housing costs are growing faster than incomes2.

“With higher home prices and larger mortgages, it’s more important than ever to find the mortgage that’s right for you,” says Lunny.  “A flexible mortgage that offers the ability to change or skip payments, or even withdraw money if your circumstances change, can help you ride out financial difficulties more easily.”

Manulife Bank recommends that Canadians have access to enough money to cover three to six months of expenses.

2 Statistics Canada. May 30th 2016

Quebec homeowners most at risk

In addition, the Manulife Bank survey found that:

  • Mortgage holders in Quebec (76%) would have the most difficulty with an increase of 10% to their mortgage payment and are more likely to be impacted should they have a fiscal emergency, as almost 30% have no emergency funds.
  • British Columbia had the highest instance of homeowners getting help from family members when they purchased their first home, with almost half (45%) saying they either borrowed or were given money.
  • Compared with other regions, homeowners in Manitoba and Saskatchewan (73%) prefer most to own and live in their current home when they retire.

Debt management should begin at an early age

More than two in five (44%) learned “a little” or nothing about debt management from their parents—and were also most likely to have been caught short financially in the past 12 months (28%).

“Kids who learn about money and debt management are more likely to become financially healthy adults,” says Lunny. “One of the best lessons we can teach our children is the importance of saving for a rainy day. Being prepared for unexpected expenses is good for our financial health, good for our mental health and gives us the freedom and confidence to deal with the unexpected expenses and opportunities that come our way.”

(Source: Manulife Bank)

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