Rising Rates Could See Homeowners Facing Hardship
A spring 2010 study by the Canadian Association of Accredited Mortgage Professionals has unearthed some startling findings. As many as a half million mortgage holders are currently paying on mortgages that feature a variable rate of interest (some as low as 1.75%), and these same folks could find themselves hard pressed to meet their monthly mortgage obligation if rates were to go past 5.25%. Add this figure to the number of Canadians that are currently strapped by existing rates (375,000), and there will be nearly three-quarters of a million homeowners in financial straits and possibly facing foreclosure. Ironically, this report comes on the heels of an announcement by the Canada Mortgage and Housing Corporation that says builders are ramping up new home construction; in fact, activity in new home construction surpassed the 200,000 level in April 2010 – which is a level that has not been reached for over two years.
There are nearly ten million homeowners in Canada, and around half of those homeowners are still paying on their homes. The large number of homeowners with variable rate mortgages may face hardship when rates rise.
The Canadian government recently made a move to encourage people to take out a more predictable fixed rate mortgage, especially those who borrow for a term of five years or less at the current posted rate of 6.1%. Borrowers who lock in the 6.1% rate for a term that is longer than five years can qualify based on the rate of their actual lending contract.
This same study found that while 65% of borrowers did go for a fixed rate, around 29% went with a variable rate mortgage and the remainder of borrowers having a mixed mortgage. This leaves a lot of borrowers open to financial struggles if rates rise.
Overall, however, the report showed that consumers were not reckless. Around 13% of borrowers had made a lump sum payment within the last twelve months to the tune of almost eight billion dollars or around 1% of the total mortgage debt for the country. In addition, borrowers have been more apprehensive about tapping into home equity, with only around 11% of borrowers withdrawing around twenty billion dollars in equity against their homes. This represents a decrease from around thirty four billion from the same period last year. And nine out of ten homeowners, according to the study, have never missed a mortgage payment. Of the small number of homeowners who have missed a payment on their home loans, the payment was missed in the past year. This seems to confirm the long understood notion that Canadians take the obligation of their mortgages very seriously.
Economists forecast that the raising rate environment may soon hit the new home market, citing that the recovery that has been seen in the past year has like been kept afloat by lower interest rates and a built-up demand for homes during the first part of 2009, which resulting in very tight resale markets. Moreover, the housing market continues to gain momentum from consumers who are in rush to buy homes in B.C. and Ontario before new taxes kick in on July 1st. Economists say that this rush to build or sign a contract for a new home will likely lead to some payback in activity after the deadline has come and gone.
