After the economy recovers, “rates can only move in one direction—up,” says author and former MP, Garth Turner.
Like him or lump him, Turner thinks many homeowners will have a rude awakening in five years when they come up for renewal and rates are “way up” (his prediction).
Turner’s 2014 interest rate assumption of 11% seems intuitively off base, but he poses a credible question nonetheless. If someone has a 4% interest rate today, and is squeaking by, how would they do at, say, 7%?
A 3% rate hike would bring us back to the 10-year average of the Bank of Canada’s key interest rate. That is a clear possibility and it would jack up payments 33% on a typical $200,000 mortgage.
While most would be able to handle a $350/month payment increase, it could be trouble for more highly leveraged Canadians, or those without stable jobs.
Then again, this looming “disaster” could be overstated as well. With the average Canadian household earning about $70,400 (the latest stats we could find) it would take less than a 2% annual wage increase over five years to offset these $350/month higher payments.
All this aside, however, if you’re finding your debt ratios are high now, think carefully before buying the most expensive house you can afford. Just because today’s rates are low and accommodating doesn’t mean 2014 will be as hospitable.
As a rough guideline, if your TDS ratio is above 40-41%, then you’re pretty leveraged. You can check out your own debt ratios on the bottom of this helpful page from Centum LendingMax.
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