Are Canadian mortgage holders in peril if interest rates rise?
The Canadian Association of Accredited Mortgage Professionals (CAAMP) studied that question in its 2011 report, Stability in the Canadian Mortgage Market.
It looked at the Gross Debt Service Ratio (GDS) and the Total Debt Service Ratio (TDS) in different scenarios. The GDS Ratio suggests that those with mortgages spend a maximum of 32 per cent of their monthly pre-tax income on housing – including mortgage principal and interest, taxes and utility costs. (People who own condominiums should also include 50 per cent of condominium fees.) The TDS Ratio suggests borrowers should spend a maximum of 40 per cent of their gross monthly income to service their mortgage and other debts such as car payments (as the Canadian Bankers Association sees it; CAAMP says 45 per cent is okay).
For variable rate mortgages in Canada, the average GDS ratio was 19.6 per cent – well below lender standards of 32 to 35 per cent. TDS ratios averaged 28.9 per cent – comfortably below the 40 to 45 per cent standard.
For fixed rate mortgages, the average GDS was 22.5 per cent and the average TDS was 32.5 per cent – also well below standards.
But what if interest rates rise? CAAMP’s simulations assumed that rates would rise to 5 per cent for all types and terms of mortgages – about 1.5 percentage points higher than current rates on a five-year fixed mortgage, and well above fixed rates for shorter terms.
The CAAMP research concluded that the vast majority of current borrowers could afford payment increases, if interest rates rise to 5 per cent.
For variable rate mortgages, the average TDS would rise to 33.7 per cent. Under one per cent of these mortgages would have TDS ratios of 45 per cent or more.
For fixed rate mortgages, the average TDS would rise to 32.5 per cent; about one per cent would have TDS ratios of 45 per cent or more.
In total, about 2,000 to 2,500 home buyers who purchased in 2010 might have TDS ratios of 45 per cent out of 9.45 million home owners in Canada.
That research is based on insured mortgages for recent purchases – the highest-risk mortgages in Canada. For Canadian mortgages taken as a whole, risks are even lower, CAAMP says.