The uncertainty and economic disruption of the past nine months of COVID-19 has more than a few homeowners on edge. (About 297,000 of them, according to the Canadian Bankers Association.) For borrowers whose mortgages were a challenge to pay off before the pandemic seized the country and began throttling businesses left and right, any increase in the cost of homeownership pushes them one step closer to delinquency.
“Especially in Canada, where we have some of the highest personal indebtedness levels of any country in the world, a lot of people probably own houses and pay for mortgages they really can’t afford,” said Justin Thouin, CEO and co-founder of LowestRates.ca. “Therefore, any large increase in expenditures could make it more difficult for them to pay their mortgages.”
One cost that has begun putting an uncomfortable amount of pressure on some borrowers is home insurance, where industry players are reporting average cost increases of 5-10% for 2020.
As Thouin explained, the rise of both extreme weather events, which are costing the world’s insurers billions every year, and home prices, which increase the cost of insurable repairs, mean the price of home insurance will only keep rising.
“Anything that increases the number of claims, or increases the amount of damage or frequency of damage to a home or apartment building, is going to increase insurance rates,” Thouin said.
In LowestRates.ca’s recent report, its inaugural Home Insurance Price Index, the group compared the increase in home insurance rates in Canada’s three largest housing markets: British Columbia, Alberta, and Ontario. While the cost of insuring a house showed relatively little change in each province from the third quarter of 2019 to Q3 2020 – it dropped by 1% in Ontario and rose by 1% in Alberta and 6% in B.C. – a far more disturbing story is unfolding in the condo space, where the average cost of insurance in B.C. and Alberta rose by 16% over the period studied. (Rates in Ontario rose by 3%.)
Because of the sky-high deductibles being charged to condo corporations in B.C. and Alberta, Thouin said condo insurance “is the one we really need to be concerned about.”
“Basically, the insurance companies are saying, ‘If we want to be in this commercial business at all, we have to have a way higher deductible because we’re losing a ton of money,’” he explained. “You’re seeing a lot of the commercial insurance companies pulling out completely because they’re losing so much money on condos.”
Those increased costs are already being passed on to condo owners, who are being forced to use their personal insurance to pay for damages their condo corporation’s reserve funds aren’t deep enough to cover.
“As a result, personal condo insurance claims, and prices, are going up,” Thouin said.
Even though it’s condo corporations in Western Canada that are currently gasping in disbelief at their new insurance bills, Thouin said it is only a matter of time before condo operators in the province’s largest housing market begin grappling with the same problem.
“All of the experts that we’ve spoken with believe that this phenomenon will occur in Ontario as well,” he said.
How brokers can help
It’s no secret that financial literacy in Canada is one of the country’s weak spots. Study after study has proven that most of us wouldn’t know a good financial decision if it sat on our chest and pistol-whipped us with a copy of The Wealthy Barber.
“In a lot of cases, Canadians are just taking money, throwing it in the garbage, and burning it,” said Thouin. “They just don’t know any better. They stay with the same insurance company for years and years because it’s what their parents have done, and they’re wasting thousands of dollars a year. It’s sad.”
There’s a simple way brokers can potentially save their struggling clients' money, Thouin said: Encourage them to compare insurance rates. Even though the insurance industry is reporting average price increases of 5-10% in Canada, Thouin said consumers who have taken the time to compare are actually saving money.
“When we look at people on our own site, they’re actually paying less versus last year, or basically the same. It shows that just because costs are increasing on average, it doesn’t mean that every insurance company is. You could save yourself, in this case, 5-10% just by comparing,” he said.
In a country where financial literacy is so poor – Thouin said a recent LowestRates study found that Canadians spend more time thinking about what colour to paint their walls than they do comparing their mortgage and insurance options – it doesn’t always take financial wizardry on the part of a mortgage broker to bring a worried client peace of mind. Sometimes, all it takes is a little common sense.