The Financial post published an article today, that i put below about the concerns of rising rates.Rates are going to increase in Canada, the level should be moderate. This will allow all of us to adjust to the rates and manage the debt load. The best option right now if you are on a variable rate mortgage is to increase your payment to a level of say 4.00% payments. This way you will pay more principal down now and be prepared as the rates do move higher.
A new report from the country's mortgage brokers suggests up to 375,000 Canadians with home loans are "challenged" by current rates and that figure will more than double if interest rates climb to 5.25%.
The report comes on the same day Canada Mortgage and Housing Corp. said builders continue to ramp up their activity with new home construction surpassing the 200,000 level in April on an seasonally adjusted annualized basis - levels not seen since 2008.
"I think overall the message is that we are being prudent and doing well. There are a lot of stats to support that," said Jim Murphy, chief executive of the Canadian Association of Accredited Mortgage Professionals, whose study done in April found an additional 475,000 mortgage holders would have trouble making payments if rates rose to 5.25%.
According to the group, there are 9.3 million homeowners in Canada and about 5.55 million have mortgages. Of particular concern is the number of consumers with variable rate mortgages, now as low as 1.75%, who could be impacted if rates rise.
Last month, the government moved to push people into fixed-rate mortgages by requiring anybody borrowing for a term of less than five years to qualify based on the posted rate - now 6.1%. Consumers who lock in for a term five years or longer can qualify based on the rate on their actual contract.
The CAAMP survey found that while 65% of those borrowing have gone to a fixed rate, 29% still remain variable with the rest having a mixed mortgage. Of the 475,000 who could be vulnerable if rates rise, 275,000 are in variable rates.
"They have the option to lock in," said Will Dunning, CAAMP chief economist, who added that in a rising rate environment their option to get a rate below 5.25% could be fading.
Mr. Murphy said other information in the report doesn't paint a picture of a reckless consumer. The survey found 13% of borrowers made a lump sum payment over the past year, totalling $7.8-billion, about 1% of the total mortgage debt outstanding.
Consumers have also been more cautious about tapping into their home equity. About 11% of borrowers withdrew $20-billion of equity from their home in the past year, a drop from the $34-billion for the same period a year earlier.
The survey also found 93% of mortgage holders have never missed a payment. Of the 7% who failed to make a payment, the majority did so in the last year.
"The very high percentage of Canadians who have never missed a payment confirms that Canadians take their mortgage obligations seriously," said Mr. Murphy.
The rising rate environment may soon hit the new home market. "The recovery in housing markets through the past year has likely been buoyed by still-low interest rates and pent-up demand built-up over the first half of 2009, resulting in very tight resale markets," said Nathan Janzen, an economist with Royal Bank of Canada.
The housing market also continues to get a boost from consumers hurrying to buy homes in Ontario and British Columbia before new taxes kick in. "A rush to contract - and in some instances build - before the July 1st implementation of the harmonized sales tax in Ontario and British Columbia will lead to some payback in activity after the deadline passes," said Pascal Gauthier, an economist with Toronto-Dominion Bank.
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