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.

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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