Rising interest rates are pushing more homeowners to a place where they can no longer pay their mortgage payments, according to a new Manulife Bank of Canada debt survey.
The online survey, conducted between April 14 and April 20, found that 18 percent of homeowners surveyed are already at a stage where they cannot afford their home.
Nearly one in four homeowners said they will have to sell their home if interest rates go up. The Bank of Canada’s one-day rate rose half a percentage point to 1.5 per cent on June 2, six weeks after the survey.
According to the survey, more than one in five Canadians expects rising interest rates to have a “significant negative impact” on their mortgage, debt and overall financial situation.
Read more: How much will house prices go down as interest rates rise? It depends on where you live
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Lysa Fitzgerald, vice president of sales for Manulife Bank, told Global News that three increases observed so far this year could already have a “significant impact” on a household’s monthly cash flow.
A family that could have been budgeting $ 2,600 a month on a variable-rate mortgage earlier this year, when rates were at the 0.25 percent level seen during most of the COVID-19 pandemic, now would pay about $ 400 more per year. but since rates have risen 125 basis points, Fitzgerald says.
“In the last two or three years we have experienced very low interest rates. And many Canadians took advantage of being able to apply for higher mortgages and took them, ”he explains.
“And now (they) are in a situation where rates are rising, can they really afford that?”
Isn’t that why we have a mortgage stress test?
It is also unlikely that interest rates will remain at 1.5 percent for long. The Bank of Canada is on a rate hike as it tries to control inflation, which is now at a 31-year high of 6.8%.
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If the Manulife survey is accurate, there could be a wave of new listings coming to market in June after the last rate hike, as worried homeowners are looking to downsize or exit the market.
But John Pasalis, president of Toronto Realosophy mortgage brokerage, says there hasn’t been a flood of homes on the market so far this month; describes the overall trading volume as “soft” right now as market activity moderates.
4:47 The housing market is starting to soften The housing market is starting to soften
Pasalis says homeowners should be isolated from a rapid rise in interest rates thanks to the stress test of the federal mortgage, “in theory.”
The mortgage stress test shows that the vast majority of home buyers (some credit unions or private lenders may be exempt, Pasalis notes) meet the requirements for a mortgage rate of 5.25 percent or two percentage points more. higher than its actual rate, whichever is higher.
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This helps ensure that your household income can afford higher monthly mortgage rates when interest rates rise.
Read more: This is how the mortgage stress test works
But for Canadians who rushed into the housing market during the pandemic with the promise of two percent or lower mortgage rates, the time to renew is fast approaching with rates around four percent now the norm, potentially doubling your monthly payments.
“The stress test of the mortgage will certainly help some households. But for some households that will see their mortgage payment more than double over the next three to four years, they will not be able to handle these additional payments. combined with the fact that many of the other costs in their lives, due to inflation, have increased, ”says Pasalis.
Nearly half of Canadian borrowers say debt is affecting their mental health, the Manulife poll showed, and nearly 50% of respondents say they would have difficulty managing surprise expenses.
Leah Zlatkin, a mortgage broker and expert on lowestrates.ca, says that even in the lean years, most household budgets should be able to accommodate even big jumps in interest rates. of the Bank of Canada.
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He cites the stress test of the mortgage and the interest rate cycle as two confidence measures for Canadian home buyers worried about how high their monthly payments will go.
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“It’s like a hill. Maybe you’re looking down from the bottom of the hill, looking up right now and thinking to yourself, ‘Wow, I don’t know how far interest rates will go,’ but there’s always a at which point the hill begins to go backwards, “he says.
“Trust that you have qualified for a stress test and know that the crescendo of the hill is approaching and soon things will return to the other side and you will feel a little relief.”
Do Home Buyers Know What They’re Getting Into?
For first-time homebuyers who jumped into real estate during the pandemic, seeing rates rise for the first time could be a wake-up call and can even lead to “buyer’s remorse,” as it goes. call Manulife the results of the survey.
Zlatkin says there is a “huge range of understanding” in Canada when it comes to the mortgage process. Some shoppers, even those at the top of the income scale, may not know the difference between a fixed or variable rate mortgage and how different models can affect the size of a monthly payment. or the time to repay the loan.
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Read more: Fixed or variable? How To Choose A Mortgage As Interest Rates Rise
Potential home buyers applying for a mortgage would be wise to ask advisors about what they should expect over the next three to five years, Zlatkin says. She imposes on brokers like her the responsibility to break down the components of a mortgage contract to her clients.
“We need to be very careful and aware that we are asking the right questions as consumers to the people we work with for our mortgage. And we also need to be very concerned as professionals because we are explaining all the details in our database. of customers, “he says.
Pasalis also says it’s no surprise that the typical homebuyer may be caught off guard by today’s rate hikes, given the central bank’s early-pandemic message that interest rates would remain the same. at these lower levels for a while.
“Our message to Canadians is that interest rates are very low and they will be there for a long time,” Bank of Canada Governor Tiff Macklem said in a speech in July 2020. the bank maintained its 0.25. percentage due to the “extreme uncertainty” of the COVID-19 pandemic.
“People make financial decisions based on what our leaders tell us,” Pasalis says.
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“I think part of the blame is on households, but at the end of the day, I don’t think they were promises that our policymakers should have made to buyers for the first time.”
– with archives by Anne Gaviola of Global News and The Canadian Press
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