BMO reports that 18% of Canadians “do not think they can handle higher payments” if interest rates go up. That’s a mite bit disconcerting.
“Higher payments” is a little vague, though. Does that mean those respondents cannot handle a $100 per month payment increase; or is something like $300 a month closer to their average breaking point?
We took it upon ourselves to clarify the exact question posed in the survey.
“To what extent do you agree with the following statement: ‘I would be able to afford my current mortgage payments if interest rates were to rise?’”
The nationwide responses were:
67% strongly agree or somewhat agree
18% somewhat disagree and strongly disagree
18% prefer not answering or are unsure
Interesting…but the results would be a lot more telling if the question had referenced a specific interest rate increase.
People react quite differently depending on how high rates are assumed to rise. A 1/2% prime rate increase, for example, is a relative non-issue. A 4% rise, on the other hand, could put a slew of borrowers in financial distress.
For these reasons, this study doesn’t yield as much perspective as it could. But, it does remind us that some people need to ask tougher questions before jumping into a mortgage.
If you’re refinancing or buying a new house, you have to ask things like:
“Can I afford at least a 3% rate increase (at renewal and/or during the term, if a variable rate)?”
“If I had to sell my home in a few years and the value dropped 15%, would I have enough equity to pay off my mortgage (or enough savings if I needed to cover a shortfall)?”
It’s hard to overstress the importance of financial breathing room. “Livin’ on the edge” may be a great Aerosmith song, but it’s no way to approach a mortgage.
More about the survey: BMO’s poll was completed on-line from January 17 to January 20, 2011 by Leger Marketing. The sample was 1,511 Canadians, 18 years of age or older. BMO states a probability sample of the same size would yield a margin of error of ±2.5%.