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(Alex Slobodkin/iStockphoto)
(Alex Slobodkin/iStockphoto)

Mortgages

Affordability uncertain for many with even small rate hike: report Add to ...

An interest rate hike of 2 per cent would leave four-in-10 Canadians unsure about whether they could afford their homes, according to a new study from the Bank of Montreal.

The survey, compiled for BMO by Leger Marketing and released Wednesday, found 43 per cent believe an interest hike would either hamper their ability to pay or leave them on unsure footing.

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One-in-five Canadians surveyed said a 2 per cent rise would hurt their ability to make mortgage payments, while 23 per cent said they were unsure if a rise would affect them.

The report also found 57 per cent of respondents believe they could still afford their home if interest rates spiked two per cent.

The survey findings come as some of Canada's biggest banks begin raising variable mortgage rates, even though the Bank of Canada's overnight interest rate remains unchanged.

That could signal the end of the era of cheap borrowing that has encouraged many Canadians to take on houses they may not have been able to otherwise afford.

BMO anticipates that the Bank of Canada will begin increasing interest rates from the current one per cent next year.

Many in the mortgage industry have recently advised homeowners to take on the previously less-popular variable mortgage rates as interest rates had remained low since the end of the recession, when the Bank of Canada pushed its overnight rate down to an emergency low 0.25 per cent.

But looking ahead, some industry watchers say now is the time to consider switching to lock in longer term rates with shortened amortization periods.

“Our interest rate outlook now projects that fixed mortgage rates will trump variable. While the decision ultimately depends on the individual, the low rate combined with a shorter 25-year amortization will significantly strengthen household financial stability,” said Doug Porter, deputy chief economist at BMO Capital Markets.

In a report issued last week, Mr. Porter and colleague Benjamin Reitzes argued that with the U.S. recovery gathering steam, central bankers on both sides of the border are becoming more comfortable with the economy and less so with historically depressed interest rates.

Already, financial markets have priced in a near 50 per cent chance that Bank of Canada governor Mark Carney will start hiking his one per cent policy setting before the year's end, they noted.

Both Finance Minister Jim Flaherty and Carney have recently flagged the danger to the economy of Canadians becoming increasingly indebted, mostly through taking advantage of low rates to buy homes or take out home equity loans. Household debt to disposable annual income is above 150 per cent and likely to rise further toward the 160 per cent level that preceded the housing collapse in the U.S., say analysts.

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