The BMO Bank of Montreal survey found that while most Canadian households could survive a stress-test against the possibility of rising interest rates, one in five said a two-percentage-point rise in rates would hamper their ability to afford their home and a further 20 per cent said they didn’t know.
In B.C., where Vancouver is home to the priciest houses in the country, 48 per cent said they could still afford their home if rates went up by two percentage points. Thirty-two per cent said they could not afford their mort-gage if rates went up two percentage points, while 20 per cent of respondents were not sure if they could afford the rate increase.
Although the survey is based only on borrowers’ perceptions, it’s still very alarming, said John Andrew, real estate professor at Queen’s University. “It’s alarming because we’re only talking about a two-per-cent increase here, and it shows how borrowers have become acclimatized to low interest rates.
“We have no experience with this because mortgage rates have never been this low. We’re in virgin territory for everybody.”
In Vancouver, new mortgages aver-age from $500,000 to $600,000, said Carolyn Heaney, BMO’s area manager specialized sales and mortgages for Vancouver.
The report coincides with the end of BMO’s offering two low-rate mortgage options – a 2.99-per-cent five-year rate and a 3.99-per-cent 10-year rate, both of which are limited to 25-year amortization and have limited prepayment options. Using the 2.99 rate as a baseline, the monthly payment on a $500,000 mortgage would be $2,364 for 25 years, Heaney said. If the rate went up to 4.99, the payment would jump $541 a month to $2,905.
“As a consumer, while there is no guarantee where rates are going, I think most of us can speculate that rates will be going up in the next couple of years,” Heaney said. “Let’s say in three years you’re going to be asked to pay $2,900, what kind of impact will that have on your cash flow?” According to BMO Economics, interest rates are expected to increase beginning next year.
Andrew said he wouldn’t be at all surprised to see a much larger rate increase – of six or seven percentage points – in five years time.
“I think that’s entirely within the scope of possibilities,” said Andrew, who is also director of the Queen’s Real Estate Roundtable. “We know it’s highly competitive for banks right now. Are they going to turn you down if you couldn’t keep up the payments at four or five per cent? I’d be surprised if that’s the case.”
Andrew said the survey results are even more concerning when total household debt is considered.
“Mortgages are a big part of the problem, but they’re not the whole problem,” Andrew said.
Many other lenders followed BMO’s lead, offering low-rate mortgages, sometimes with more flexibility; several other lenders have already pulled their low-rate offerings.
- Tracy Sherlock, Vancouver Sun
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