1 in 5 Challenged by 2% Higher Rates: BMO

Affordability-of-Mortgage-Payments20% of Canadians say a 2% rate increase would “hamper their ability” to afford their home. That’s according to a February 21-23 BMO/Leger survey.

This figure isn’t surprising given that November 2011 data from CAAMP suggested 21% of Canadians “couldn’t afford” a 2% rate increase.

One question that might come to mind when reading this is: How likely is a 2% rate increase?

If you assume economists are right (despite their prediction track record) and that the overnight rate will revert to a 3-4% neutral rate, then that equates to a 200-300 basis point rate hike.

A 2% move seems somewhat realistic against that backdrop. The timeframe for that kind of rate change is another issue. It could be Q1 2013, as economists are currently forecasting, or it could be 2014 when the U.S. Fed is expected to make its first rate increase of the cycle.

A second way of looking at it is to evaluate historical data. Strictly speaking, the past doesn’t reflect the future because rates are largely random, but it does illustrate what rates have been capable of.

In the previous three rate cycles (an admittedly insufficient sample size), prime rate has increased an average of 3.16% from the trough to their peak. Thus far, we’ve already moved up 0.75 percentage points since September 2010.


None of this is to imply that a rate hike is imminent. But it does suggest that those 20% of people who can’t afford a 2% rate hike should do some budgetary planning now while they have the chance.

Survey Notes: The survey was completed online with a national sample of 1,500 Canadians aged 18 years and up. A probability sample of that size should yield a margin of error of +/-2.5%, 19 times out of 20.

Rob McLister, CMT

  1. Another question is: Will income gains help? Lately, income gains have lagged economic growth, so likely not much, unless something changes.
    If subprime is such a small fraction of Canadian lending, how can 20% not afford a rate hike small enough that its eventual occurrence is inevitable? Were these people prime, but fell on hard times? Racked up the CC and HELOC debt after getting the mortgage? And let’s add in a fraction of those who said they were unsure, rather than just focusing on those who knew they’d be sunk.
    Overall, I find it hard to reconcile the rosy spin CMHC puts on its portfolio and the constant chant of “no subprime here” with survey results such as this. Obviously, there’s a lot more people with borderline cashflow issues than some would have us believe.

  2. Anyone know where one can get a copy of the actual survey questions? How you ask these things changes the answer rather a lot.

  3. I think 2% increase is even more likely for many than you may think. Take for example, people who have to renew their mortgage and have a variable mortgage of Prime minus 1% will have a hard time finding those kind of variable rate mortgages at all. They might face a “1%” increase even without an increase in the BoC rate. If you combine that with an increase in the BoC rate … you might end up with a realistic case of 3 to 4% increases. If that happens then watch prices for homes drop hard and fast.

  4. A 2% increase in 5 year rates would mean a 5 year fixed rate of about 5.49%…this is still a lower rate than on our first mortgage (5 year fixed at 5.69% back in late 2002)…maybe not so bad, unless you’ve bought “too much house”…

  5. Is that supposed to add fuel to the fire? For the past two years the banks have engaged in rate wars by even willing to take losses on mortgage margins to gain and keep market share. And now they come up with research that says 20% of the people who borrowed cheap money would be in trouble if rates increased by merely 2%?! What kind of “advice” were these bankers giving to people? Historically, 5-year fixed rates have been around the 5.5 to 6% mark. Should rates return to more realistic levels in 4 or 5 years time, it’ll be interesting to see how borrowers will cope when their interest rate nearly doubles and monthly mortgage payment increases by a few hundred dollars.
    I said it before and I’ll say it again: people should not use lower interest rates to get deeper into debt but rather consolidate debt and take advantage of low rates to PAY OFF their debt. Unfortunately, that’s not happening. Less people prepay their mortgage and those that do prepay post increasingly smaller payments. I know this may sound negative or somewhat pessimistic but when I see all these bidding wars on properties and the fact that housing prices keep going up at abnormal rates and hearing Realtors and their associations talk about a “healthy” housing market, it really does make you wonder how invincible everyone think they are.

  6. In 2002, a 2 bedroom condo topped out at 300K … that same condo sells for closer to 500K now if not more on average. People are NOT buying “too much house” — they are simply paying too much $$$ for housing because interest rates are low. LIOR is correct that people are not using low rates to consolidate debt but rather to take on more to get into the market. There is no way a so called “soft landing” is in the cards when prices are 50% to 100% more in a decade!

  7. I remember reading here that only about one in three Canadian mortgage-holders paid anything extra toward their mortgage principal last year (and this in a record-low interest rate environment).
    As Lior comments, and both the stats and RE industry marketing (“affordability index”) bears this out, these low rates are all about taking on more debt.

  8. The whole point of central banks lowering interest rates is to increase borrowing, spending and the economy. Carney would love for businesses to invest in productivity, but why would they do that if they’re running at far less than full capacity? And he has no control over which segment of the economy does the borrowing.
    And of course, if we all used low rates to pay down our debts, the economy would get worse. That’s called the “Paradox of Thrift.”

  9. As usual, scary scenarios really bring out the fear in some people. To think that mortgagors will simply wait around while rates rise is naive.
    In the real world, mortgagors don’t stand still. Variable mortagage holders will lock-in a fixed rate as soon as an up-trend in rates becomes clear. Fixed rate mortgagors will blend and extend. And let’s not forget about the growing popularity of 10-year terms.
    These mitigating factors will greatly lessen the blow for the majority of borrowers, should rates begin to rise.
    Note to Ralph Cramdown and Joe Q. You can take your fingers off the panic button now.

  10. This just in: “Bank of Montreal confirmed to the Financial Post that it has quietly extended its record-low 2.99% fixed rate on a five year mortgage to its own customers and other potential clients. The bank’s latest promotion extends the deadline to April 19.”

  11. This might sound dumb – but all this fear & negativity tells me one thing.
    Everyone should be taking that 10 year rate at 4% – at least this way we can delay oblivion until 2022.

  12. What was the name of the researcher? Mr. Obvious? Of course people won’t be able to afford their mortgages. Welcome to cheap mortgages, unchecked earning claims, and the tradition of back room dealing real estate agents. Don’t forget the foreign investors. Hold onto your hats!

  13. Payments usually don’t increase when variable rate increases … in most cases, so there will be no issue for variable rate holders.
    Home prices won’t dip at all (except where they are over inflated already), look at Gas and other prices, everything you buy – products and services goes UP.

  14. soon all cents will be decommissioned, we’ll deal with dollars only :)
    and the 4l milk will cost 50$, then the 500K house will be a cheap one :)

  15. And yet arrears are just .38%.
    Yes, we know. Arrears are a lagging indicator, and so forth, and so forth. Save your typing.
    Someday you will discover that most of your beliefs about irresponsible lending practises have no basis in fact, not in this country anyway.
    Start by asking yourself two questions.
    Are the places you get your information second hand or are you in the industry and intimately knowledgeable about actual lending policies?
    Do your sources cite unbiased data that evaluates both sides of the argument?
    It is your prerogative to believe in a coming “crash,” but don’t be so fervent a disciple of doom that your mind is closed to contradictory evidence.

  16. The question arises, why do we have a qualifying rate if the client could not afford the payments at that rate of interest. For example todays QR is 5.24 and client gets a five year at 3.29…..how could they not afford a 2% increase when they qualified at the original rate of 5.24 ….boggles the mind

  17. Paul,
    The article states 1 in 5 people would face difficulty. We didn’t crash because our nation still has good laws protecting its citizens. Unlike America where special interests clearly run the financial sector through a “legal” Ponzi scheme, i.e. Madoff, MF Global more recently. The “crash” you speak of has happened in the US. Again, lucky for us our banks are better checked by the government. However, we are witnessing the harsh reality that we have lived through 40 yr low mortgages. IF a 2% increase occurs over 2 years the blow will be less of a shock, i.e. people can adjust and meet the new demands, but if that 2% occurs quicker and more sudden then the effects will be felt much harsher. Remember CPI doesn’t include fuel and food prices which would bring inflation closer to 3%.

  18. Who’s panicking? I’m just bringing some data from the CMHC itself. Rates are low, you yourself just advocated making extra payments whenever possible, but only about 30% of mortgage holders in Canada reported doing so last year.
    I remember you smacking me around the first time I mentioned it.

  19. I always wander about how they ask this question. Do they phone up people and say could you afford a 2% raise in interest rates? Do they get them to go and find an annual mortgage statement and do the calculations for them, figure out if there in any room in the amortization to extend it out at maturity if hit with a raise in rates? Most people I talk to can’t even tell you their mortgage payment exactly much less what they owe, or their mortgage rate off the top of their head. Personally surveys like this are meaningless and totally one sided looking to prove a theory they a have already decide is fact. How about gas prices? Food prices? HST? Water and Sewer costs?

  20. I think it is overly dismissive to say that opinion surveys are meaningless. That statement sounds like nothing more than a thoughtless generalization.
    Regardless of what you may think, it says something when 20% of people have doubts about their capability to make payments if rates increase.

  21. By the way, back in November CAAMP released the same finding as BMO. I presume you will dismiss that also.

  22. Let them pay for their lack of judgement! Realtors and their agents created this artificial explosion in housing prices. I am waiting in the sidelines for the interest rates to go up just like the price of gaz!

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