TORONTO - Four-in-10 Canadians would be unsure about whether they could afford their homes if their mortgage rate went up by as little as two percentage points, according to a new study from the Bank of Montreal.
The survey, compiled for BMO by Leger Marketing, found 43 per cent believe a increase from -- for example, three per cent to five per cent -- would either hamper their ability to pay or leave them on unsure footing.
The survey was conducted Feb. 21 to 23, two weeks before BMO sparked a round of special rate reductions among Canadian banks. The survey's results were announced a day before the five-year special rate ended on Wednesday.
BMO's special dropped the five-year rate by half a percentage point to 2.99 per cent from 3.49 per cent and other banks followed.
Since then, Royal, TD and National banks have announced their five-year posted rates will go up on Thursday to 5.44 per cent -- an increase of nearly 2.5 percentage points from the sale price.
"At first when you look at this you think 'oh my goodness that's pretty scary,' " said Laura Parsons, a mortgage expert at BMO.
"But if we get clients in to take a good hard look at how they're spending their money, I think they'd find that extra two per cent in their budget -- it would just mean they'd have to cut back on certain things."
One-in-five Canadians surveyed said a two percentage point rise would hurt their ability to make mortgage payments, while 23 per cent said they were unsure if a rise would affect them.
For example, a mortgage with $100,000 in principal would charge about $5,450 of interest in the first year at a rate of 5.45 per cent -- compared with $2,990 at a rate of 2.99 per cent.
The study, which surveyed some 1,500 Canadians in February, also found 57 per cent of respondents believe they could still afford their home if interest rates spiked two per cent.
The report has a 2.5 per cent margin of error 19 times out of 20.
The survey findings come as some of Canada's biggest banks begin raising variable mortgage rates, even though the Bank of Canada's overnight interest rate remains unchanged.
That could signal the end of the era of cheap borrowing that has encouraged many Canadians to take on houses they may not have been able to otherwise afford.
BMO anticipates that the Bank of Canada will begin increasing its overnight interest rate from the current level of one per cent next year.
The central bank's overnight rate influences how much commercial banks charge their customers.
Both Finance Minister Jim Flaherty and Carney have recently flagged the danger to the economy of Canadians becoming increasingly indebted, mostly through taking advantage of low rates to buy homes or take out home equity loans. Household debt to disposable annual income is above 150 per cent.
An increase of two percentge points would be a problem for those who have not only used the period of ultra-low rates to take on mortgage debt, but also home equity lines of credit and other forms of debt, Parsons said.
But, she added, the fear is not that most mortgage holders could find themselves underwater like in the U.S., but rather that they are not budgeting for the inevitability of interest rate hikes.
The Bank of Canada tends to raise rates in 25-basis point increments and are unlikely to change rapidly, but a gradual increase by two full percentage points over five years would be realistic, she said.
That should give those homeowners who are unsure of their ability to carry off a mortgage increase time to figure out where they stand in terms of their spending habits.
For most, that could mean cutting down on expenses like travelling, going out for dinner, buying a new car or other luxury expenses.
But for the most vulnerable of mortgage holders, it could mean more significant sacrifices on everyday expenses from food to gas.
Many in the mortgage industry have recently advised homeowners to take on the previously less-popular variable mortgage rates as interest rates had remained low since the end of the recession, when the Bank of Canada pushed its overnight rate down to an emergency low 0.25 per cent.
But looking ahead, some industry watchers say now is the time to consider switching to lock in longer term rates with 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 Doug Porter, deputy chief economist at BMO Capital Markets.
In a report issued last week, Porter and colleague Benjamin Reitzes argued that with the U.S. recovery gathering steam, central bankers on both sides of the border are becoming more comfortable with the economy and less so with historically depressed interest rates.
Already, financial markets have priced in a near 50 per cent chance that Bank of Canada governor Mark Carney will start hiking his one per cent policy setting before the year's end, they noted.
