The “Significance” of Rising Payments

Mortgage-payment-sensitivityBMO published a survey last Tuesday that got a ton of media play. It stated that 72% of households:

would feel a significant strain if they were to experience a modest increase in monthly mortgage payments…

Yet, despite the fact that Canadians are highly leveraged, this finding seemed suspicious. So, we investigated.

It turns out that mortgage payment sensitivity is not as dire as last week’s headlines implied.

BMO’s survey asked people to indicate what things they’d cut back on if their monthly mortgage payment increased by 5%, 10%, 15% or 20%.*

The actual results found that the 72% of respondents said a 5% increase would “have an impact – of some kind – on their household budget,” said BMO spokesperson Laurie Grant.

“Some kind” — but how much impact was not specified.

Obviously, personal budgets are finite so if you have to pay $100 more to the bank, you keep $100 less for yourself. Hence, virtually everyone’s budget is impacted somehow by payment increases.

But some writers played up the fear factor, declaring:

…Three-quarters would feel a significant squeeze in their finances from even a modest rise in mortgage payments.

Canadians are surprisingly close to the edge of not being able to afford their homes…

Higher mortgage rates would hit households hard…

Here’s the thing. A 5% payment increase on the average mortgage is $51 a month, according to CAAMP data. That’s less than 1% of the median family’s after-tax income of ~$5,600 per month.

mortgage-interest-ratesIncidentally, it would take the equivalent of two Bank of Canada rate hikes (50 basis points total) to boost payments by 5% for the typical borrower. And, it would take a 225 bps rate increase for payments to rise 20%. (For what it’s worth, economists project anywhere from 2-6 quarter-point rate hikes within 24 months.)

So, would a modest 5% mortgage payment increase have a “significant” impact on the typical borrower’s finances? Grant says no. “The word ‘significant’ should be applied to the high percentage of people (affected), not the impact on household spending habits,” she explained.

We can get a further sense of borrower vulnerability by looking at the number of homeowners forced to dip into their savings to pay their mortgage. In the past year, 17% of those polled had to withdraw from savings to make one or more mortgage payments. But a 5% payment increase would raise this 17% by only one percentage point, says BMO.

Oddly, a 10% payment increase would cause fewer people (16%) to reach into their savings, according to the poll.

And one last point: Canadian lenders and insurers have no desire to loan out hundreds of thousands of dollars without knowing the client’s future payment tolerance. Therefore, lenders routinely qualify borrowers at rates which are higher than the contract rate.

The message of this post is to look behind the headlines. Banks love to feed the press with housing surveys. But dramatic poll-related headlines always warrant a second look.

********

Here are other findings from BMO’s survey…

New-Mortgage-Rules-2012On the Effect of New Mortgage Rules

  • 22% of those polled say they’re less likely to buy a home in the next five years because of the rule changes
  • 29% who plan to buy in the next five years say they’ll likely spend less on a home because of the changes
  • 43% of homeowners were not familiar with the new mortgage regulations introduced this year

On Mortgage Affordability

  • 92% of respondents agree that debt is a serious national issue but only 19% say it’s a problem for them
  • 16% say a 10% rise in mortgage payments would leave them at risk of not being able to afford their home (Although, this doesn’t mean the majority would default on their mortgage.)
  • 1 in 4 homeowners have reduced the amount they’re saving over the past year to make their mortgage payments

On Moving intentions:

  • Within five years:
    • 18% plan to downsize to a smaller home
    • 18% plan to upsize to a larger home
    • 10% plan to sell and either rent, move into a retirement community or move in with family
    • 21% plan to purchase an additional property for income, investment, or recreation

* This question was asked to the 55% of homeowners in BMO’s poll who said they had a mortgage (562 people). They were given a list of “impacts” on their household budget to choose from such as eating out, vacation spending, renovations and so on.

The BMO Housing Confidence Report was conducted by Pollara via online interviews with a random sample of 1,011 Canadian homeowners, 18 years of age and over.


Rob McLister, CMT

  1. I didn’t buy this survey either, especially after reading this: “92% of respondents agree that debt is a serious national issue but only 19% say it’s a problem for them.”
    How is that consistent with 3/4 of people experiencing “a significant strain” by a 5% higher payment. Obviously most people aren’t that worried.

  2. Keep in mind that when rates go up, you can expect to see more job loss. Economy is bad and we are in nowhere to improve in foreseeable future.

  3. Surprise surprise. The media blows a debt statistic out of proportion. Who could have imagined?
    Good article Rob.

  4. Why attempt to `debunk` any article that moves the herd in a safer direction for their own good? This `survey` simplifies and attempts to drive home the point that many households are in for some discomfort (if not pain) if they don`t get their financial house in order. Many simply can not afford the risk of rising rates or renewing into an inflated rate environment 2,3,4 years from now and we all know it. Especially if its at posted rates because they no longer qualify for rate shopping under the new guidelines and their bank knows That. The actual issues are far too complex for the avg reader to grasp. So why poke holes in an elementary poll? Instead perhaps expound on more complex issues such as Moodys recent warning to downgrade the majority of the Canadian banking sector due to high consumer debt and inflated RE values and the subsequent effect this can have on lending. There are more important looming issues than rate and affordabilty ..like Options. Most in the banking community with experience know how quickly a paradigm shift in lending practices can occur (regardless of the BoC’s efforts). Many households including an adundance of young first-time owners (and Stated Income BFSers) in high ratio VRMs and/or HELOCS and possibly with mounting revolving debt are simply not well prepared. What advice will you have for them when Conduct of Sale is implemented because they were goated into staying on the Variable “historic trend” train when much safer options existed (past tense)?

  5. RECORD HIGH DEBT at the same levels seen in the US and UK prior to financial crisis and warranting swift warnings to the banks from the largest rating agency in the world is hardly “a debt statistic”.

  6. The only way the BofC will raise interest rates is when the Americans get their act together and actually raise their rates. Also the European union has to have their house in order. If Canada tries to raise interest rates on their own, it will be a short-lived venture. Canada doesn’t live in a plastic bubble.

  7. Indifferent,
    Folks don’t need to be misled to move in the safer direction.
    Those who feed high-profile data to the masses and influence national sentiment must be held accountable for accuracy. Clearly, debt risk is serious, especially in a subset of the population. That was noted in the story and has been covered here in countless other posts. But distorting data to grab attention is not only intellectually dishonest; it’s destructive—both economically and to the credibility of the data purveyors.
    What advice should overleveraged homeowners follow? The same advice as always, things like re-budgeting, building a cash buffer, locking in (assuming they can safely debt service), downsizing, or even selling and renting.

  8. While the delivery, source and motivation of the survey may be debated, there’s nothing misleading about the sensible core message. ‘Know precisely where you stand personally today.’ ..Know your risk ..Know your options ..Have a crystal clear plan that suits your budget realistically ..Don’t rely on blanket fixed or variable philosphies or supporters of either. Sadly many of the “overleveraged” today have no idea who they are. Educated professionals have no idea their financing or refinancing options have diminished so drastically or been eliminated completely. Traditional fail-safe refinancing, consolidating or switching (shopping for the best lock-in) ‘options’ that many believe they have are gone. The bank told them less than 2 years ago they can manage payments safely at a 40 yr amortization, or 35, or 30. Now that’s all gone for any mortgage above 80% Loan-to-Value and LTVs of course are increasing with slipping property values (adding more to the group). This is all aside from the debt and service ratio issue. UNDER TODAY’S GUIDELINES, A MAXIMUM 40 Yr TO 25 Yr AMORTIZATION IS A 35% INCREASE IN PAYMENT BY ITSELF. The survey critique minimizes the message unnecessarily and ipso-facto makes a signficant assumption that borrowers will always wish to tolerate their variable rate risk through an increasing environment. Locking in today is a 5% payment increase (assuming a best rate Option still exists for the borrower). Other than that its anyone’s best guess going forward and some can simply not afford to guess. That’s what the survey speaks to and again what is the benefit (for any of us) in distracting from that common sense message? After all it was Adjustable Rate Mortgages and a simple lack of affordability that ultimately brought the US and UK housing problems to a head. If we’re truly the conservative bunch we purport to be, encourage that. Helping prevent your neighbour’s problem may keep it from becoming yours.

  9. Look, it’s fiction to say that 72 percent of people will be significantly affected by higher payments. I think we can agree on that. I for one find your reaction abnormal. Do you work for BMO or the media? It takes a perverse sense of virtue to condone lying to all Canadians in order to protect a minority of debtors. If we’re going to lie to people, we might as well tell the Bank of Canada to warn that rates will skyrocket imminently, even though we know they won’t.

  10. No Prairieman, neither a bank or media but I’ll take a wild guess that you may be a Mortgage Broker (like many here with broken record simplistic BoC and economic predictions). Providing a complete picture and ALL cautionary caveats (not just a concern for preserving client ‘touch-points’) is a good idea ..and more truthful. I don’t know what percentage of Variable rate holders will be significantly impacted, neither do you, or they, or anyone else. That’s the point. The ‘rules’ are a moving target. That’s the truth. Caution SHOULD be the underlying message. Not agressively protecting those debtors who can least afford the actual risk (an expanding group) is a slippery slope. A mistake we’ve seen a vivid example of in similar markets. PS. After the dust settled in the US 4 years ago, the Mortgage Broker industry was desimated. Blamed for being a bunch of enablers instead of cautionary advisors. Don’t let history repeat itself. The Variable bandwagon is simply too full. Mali principii malus finis.

  11. Rob, I don’t see anything in the survey as sinister as “twisting facts” implies. The message is a sensible one. An unbiased critique would have also mentioned reduced amortizations and lower loan-to-values. Both of which certainly contribute to “The Significance of Rising Payments”. I also noticed that about a $200K mortgage was used in the critique rather than the actual current national avg of $301K. Again I don’t understand the skew towards risk over safety. Who cares if BMO is trying to gain more market share with their infamous restrictive “specials”. Yes there’s better options but the core message is still timely, sensible and not only coming from BMO.

  12. Indifferent,
    The data — including interpretations provided to us by BMO itself — simply does not support that “72% of Canadian households will be significantly affected by [a 5%] payment increase.” An important minority yes, but certainly far from 72%–a number which is groundless and unnecessarily alarming.
    There is no argument that BMO’s press release contains useful information. Unfortunately, sensationalizing the headline data point taints its credibility.
    A search of CMT’s 1,900+ stories will reveal numerous articles that discuss the debt threat and advocate responsible borrowing, including things like maintaining reasonable debt ratios, stress testing your budget, waiting to save up a bigger down payment, not relying on refinances, building contingency savings and so on. But not every story can be a debt warning. The focus of this particular post was integrity in research and reporting, an issue that’s increasingly vital in an age where hype sells banner ads.
    As a side note, the average Canadian mortgage is indeed approximately $170,000, as per CAAMP’s Spring Mortgage Report 2012. Source
    All the best…

  13. Here is some Latin for you: Stopi blowingis outi proportioni.
    Only 1 in 4 mortgages are variable and most who got them have very strong credit. Plus, variable rates are already approved based on higher payments. The end of the world is simply not as near as you’d like everyone to believe.
    By the way, who is “aggressively protecting those debtors who can least afford the actual risk?” I don’t see anyone doing that. You best step off your high horse and come down to terra firma.

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