According to a recent study by the Bank of Montreal, four in ten Canadians would feel the pinch if best rate mortgages saw a two percent interest rate increase. The study, which was compiled by Leger Marketing, found that 43 percent of Canadian homeowners believe an interest rate increase would either hamper their ability to pay their mortgage or leave them on rocky financial footing.
The study also found that one out of every five Canadians surveyed felt that a two percent increase would hurt their ability to make their mortgage, while 23 percent were unsure how a hike would affect them. Just over half, 57 percent of respondents felt that they could still afford their home if interest rates were to increase (the survey was completed online with a national sample of 150 Canadians over the age of 18).
This isn’t the first time mortgage brokers have heard talk of troubles surrounding a rate increase. Back in November of 2011, CAAMP released data suggesting that 21% of Canadian’s “couldn’t” afford a 2 percent increase.
Which leads us to the million dollar question – just how likely is a two percent rate increase?
Tough Times Ahead?
BMO’s survey findings come just as some of the nation’s biggest banks begin raising variable mortgage rates – even though the Bank of Canada’s overnight rate remains fixed. To some mortgage experts, this is a sure sign that the recent era of affordability is coming to an end and that trouble could be on the horizon for many homeowners.
According to economists, the Bank’s overnight rate will likely revert to a three or four percent level at some point, the question is when. Some estimate the first quarter of 2013, while others insist the rate will stay frozen until at least 2014 when the U.S. Fed is expected to make its first rate increase.
But not everyone is confident in this forecast. Already, financial markets have priced in a near 50 percent chance that the Bank of Canada will revisit the rate before year’s end. This after both Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have remarked on the dangerous levels of consumer debt Canadians have taken on. According to the most recent numbers, household debt to disposable annual income is above 150 percent… and rising.
What Does Historical Data Tell Us?
While some economists like to refer to historical rates in order to predict future changes, this isn’t necessarily the best approach. The past rarely reflects the future because rates are largely random. However, in the previous three rate cycles, prime rate has increased an average of 3.16% from the trough to the peak. During this current cycle, we’ve moved just 0.75 percentage points since September 2010.
So What’s The Best Mortgage Rate Now?
Is it variable or fixed? Up until recently, many in the mortgage industry have advised homeowners to go for the often avoided variable mortgage products in order to take advantage of historically low interest rates. This was especially popular when the Bank of Canada pushed their rate down to the rock bottom rate of 0.25 percent.
However, best rate mortgage hunters are now being advised to consider fixed rates in response to potential rate increases. A longer lending term coupled with a shorter amortization period could help protect borrowers from rate spikes both now and down the line.
As the nation’s banks become bolder and more comfortable with the economy, Canadians need to become smarter and more conservative in their borrowing. Should interest rates skyrocket, the nation could find itself on the brink of a housing collapse that would bring with it wide-spread economic ramifications.