Rate hikes mean some mortgage holders would face difficulty
May 10, 2010
Tony Wong
An estimated 15 per cent of Canadian mortgage borrowers say they would have difficulty with their mortgage payments if rates increased, according to a survey.

“Rising interest rates will bring challenges,” economist Will Dunning said in a report for the Canadian Association of Accredited Mortgage Holders released Monday.

“A very important question for the housing market and mortgage markets and by extension the Canadian economy is to what extent mortgage borrowers will be able to accommodate increased mortgage costs.”

Based on a 5.25 per cent mortgage rate, about 850,000 borrowers who are “already having trouble making their payments or who may see cost increases that will exceed their tolerance,” would be affected, the study estimates.

“Most of the difficulties would be faced by borrowers who purchased their properties during the past half decade,” said Dunning.

As interest rates continue to rise, the 5.25 per cent rate is not a stretch to imagine in the near future.

Posted five-year rates are already above 5.25 per cent, but discounted rates can be had in the 4.6-per-cent range. Variable rates can be as low as 1.75 per cent.

“People who have variable mortgages would be hurt the most in that scenario,” said Dunning.

Economists forecast that the Bank of Canada will likely increase its overnight lending rate in July, although big banks have already begun to increase their fixed mortgage rates. Rates have increased on some mortgages by 85 basis points since March.

Debt has been a concern of the central bank. The bank’s own calculations show that almost one in 10 households would have debt that would make them vulnerable to economic difficulty by 2012 based on current trends.

However, Dunning says the debt impact of rising rates would be lessened by several factors, including results that show more borrowers are paying more than they are required to. About 40 per cent of borrowers are making payments of at least $100 or more per month than required giving them flexibility in the future.

Meanwhile, about a million mortgage borrowers may see reductions in their costs since their rates already exceed 5.25 per cent.

Canadian mortgage borrowers also have considerable equity in their homes.

“Most of those who might face unaffordable increases in mortgage costs could solve their problems by selling their properties,” said Dunning.

Whether they will be happy about selling their property or get top dollar is another question. Recent reports show some analysts are looking a decrease in existing home prices for next year. And housing starts this year have already surpassed forecasts as new supply is being added to the housing stock.

Ontario housing starts edged up in April, as builders continue to break ground on new housing to meet demand.

An estimated 62,400 residential units broke ground, up by 4.5 per cent from March according to seasonally adjusted and annualized figures from the Canada Mortgage and Housing Corporation released today.

For the first four months of the year, Ontario new home construction is running 33 per cent above the levels of a year ago.

“On the whole, the report underscores the strong recovery in Canadian home building activity and the Canadian housing market,” said Millan Mulraine, senior strategist with TD Securities.

Much of the growth was in the Toronto market, where condominium builders are busy pouring foundations.

Seasonally adjusted starts hit 32,800 in April, up by 25 per cent from the prior month.

“The rise in housing starts last month was due to an expected rebound in condo apartment starts,” said Shaun Hildebrand, CMHC’s Senior Market Analyst for the Greater Toronto Area.

While detached single starts had led the increase in construction over the past year, affordability issues means that buyers are now switching to cheaper condominium stock, says the CMHC.

Nationally, housing starts inched up by 1.3 per cent to 201,700 annualized units, just slightly below expectations, but still considered a robust level of activity.