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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