A new report released last week by BMO Bank of Montreal revealed that the majority of Canadian households are 'stress-tested' against the possibility of rising interest rates. However, 43 per cent of Canadians say that a two per cent hike in interest rates would leave their ability to afford their home on unsure footing.
The Leger Marketing report was conducted before the recent interest rate outlook from the Bank of Canada. According to BMO Economics, interest rates are expected to increase beginning next year.
The survey revealed:
- The majority of Canadian homeowners (57 per cent) say that they could still afford their home if interest rates were to climb by two per cent.
- However, one-in-five (20 per cent) indicated that a two per cent rise in rates would hamper their ability to afford their home; 23 per cent indicated they were unsure if a rise in rates would affect them.
- Almost half of women (49 per cent) would have trouble affording their home in the face of rising rates, while more than one-third (37 per cent) of men claimed the same.
"Stretching the limits of your budget by choosing the maximum amortization period and a minimum down payment leaves you little wiggle room to deal with an unexpected financial challenge," said Katie Archdekin, Head of Mortgage Products, BMO Bank of Montreal. "At BMO, we've been encouraging homebuyers to take a 25-year amortization and stress-test their mortgage with a higher interest rate to ensure they can afford it over the long-term."
Currently, BMO offers a new 10-year mortgage at a great introductory rate of 3.99 per cent with a maximum 25-year amortization. It is modeled after the popular 5-year maximum 25-year amortization mortgage at 2.99 per cent.
Today, March 28, marks the last day both limited time rates offers are available to new and existing customers. Ms. Archdekin advised those looking to buy a home in the next three months to visit a local branch and get pre-approved today for 90 days to guarantee these great rates as they search for a home.
According to Doug Porter, Deputy Chief Economist, BMO Capital Markets, financial stability for Canadian homeowners in the coming years will be supported by locking-in and opting for shortened amortization periods.
"Our interest rate outlook now projects that fixed mortgage rates will trump variable. While the decision ultimately depends on the individual, the low rate combined with a shorter 25-year amortization will significantly strengthen household financial stability," said Mr. Porter.
Regionally, the report revealed:
| Stress-tested | | ATL | | | QC | | | ON | | | MB/SK | | | AB | | | BC | |
| Yes | | 50 | % | | 51 | % | | 58 | % | | 69 | % | | 73 | % | | 48 | % |
| No | | 19 | % | | 17 | % | | 20 | % | | 15 | % | | 13 | % | | 32 | % |
| Unsure | | 31 | % | | 32 | % | | 21 | % | | 16 | % | | 14 | % | | 20 | % |
BMO offers the following tips for homebuyers
| Make sure you can afford a rise in mortgage rates: |
- Stress test your financial budget using a mortgage payment based on a higher interest rate.
- Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of household income.
| |
| Consider a shorter amortization: |
- The shorter the life of the mortgage, the less you pay in interest.
| |
| Make a larger down payment: |
- If you can provide a bigger down payment, it's a significant way of helping you pay less interest over the life of your mortgage.
| |
| Always make sure you save for a rainy day: |
- If you are up to your maximum in debt, you may not be well prepared for the leaky roof along the way.
| |
| Think carefully about fixed vs. variable: |
- While variable rates mortgages have been a winning strategy over the long term, fixed rate mortgages (currently at historic lows) come with the peace of mind of being insulated against rate increases and knowing how much of your mortgage you will have paid down at the end of your term.
The survey was completed on-line from February 21 to 23, 2012, using Leger Marketing's online panel, LegerWeb. A sample of 1500 Canadians, 18+, were surveyed.
A probability sample of the same size would yield a margin of error of +/-2.5%, 19 times out of 20.