Stress test your mortgage for the long term

Canadians have been enjoying low interest rates for the last four years, and this is likely to continue; most economists agree there will be only minor upward adjustments in 2015. Still, experts also urge homebuyers to stress test your mortgage for the long term. Consumers have been used to low interest rates for so long – and some have built up dangerously high levels of personal debt – that when rates do go up, many homeowners will be caught off-guard.Stress testing mortgageSo off-guard, warns the latest BMO Home Buying Report, that the majority of Canadians currently in the market for a home would be forced to change their buying plans in the event of a two percentage point rise in interest rates.

  • A two percentage point rise in interest rates would strain affordability for two-thirds (67 per cent) of potential homebuyers
  • One-quarter (24 per cent) would be stretched to afford a home in their current price range, but would not reduce their budget
  • Thirty per cent would be forced to reduce their price range and settle for a less expensive home; while another 13 per cent would be priced out of the market
  • One-third (33 per cent) would not be affected by an increase of two percentage points

Significant rate hikes unlikely in 2015

Given the four-year lull in rate hikes, a two-percentage point increase in the next year is unlikely. BMO’s own chief economist, Douglas Porter, agrees, but the company’s mortgage experts caution, homebuyers should also stress test their mortgage against rate increases further down the road, particularly as home prices soar in certain markets.“Gauging the stability of your mortgage by stress testing it against a higher interest rate is key to making a responsible and informed homebuying decision,” says Laura Parsons, mortgage expert, BMO Bank of Montreal.

Many buyers, especially in larger cities, need to evaluate different circumstances, and the likelihood of being able to afford their purchase long term.The effect of a rise in interest rates would be more pronounced in Vancouver, where 22 per cent of potential buyers would be forced to leave the housing market – nearly twice the national percentage. Buyers in Calgary, however, would feel the pinch the least, with nine per cent cancelling their homebuying plans as a result of rising rates.According to BMO Economics, although the national level of sales is near four-year highs, the seemingly calm exterior on sales and prices masks a deepening divide between booming prices in three major cities, and lacklustre activity in much of the rest of the country.

Calgary, Toronto and Vancouver vulnerable

“Prices in the three hottest cities – Calgary, Toronto, and Vancouver – are rising faster than family income, further straining affordability,” says Sal Guatieri, senior economist, BMO Bank of Montreal. “The continued rapid price gains in these cities will increase their vulnerability to a shock-whether economic, interest rate or otherwise.”

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