Nearly 20% of Canadians don't know if they'll be able to make their mortgage payments if interest rates increase, according to a recent poll released by the Bank of Montreal -- disturbing findings given that BMO expects the Bank of Canada to raise its benchmark rate by at least one percentage point by the end of the year.
While a one-point increase shouldn't cause unreasonable strain, "Canadians should prepare for interest rates to eventually return to historic norms," Guatieri adds.
Still, two out of three homeowners believe they'll be able to meet increased mortgage payments when and if rates do rise, according to the poll results. Regardless, BMO is urging consumers to "stress-test" their mortgages using a mortgage payment based on a higher rate to make sure they can continue to afford to pay.
Experts from Bank of Canada governor Mark Carney to federal Finance Minister Jim Flaherty and others have warned about the threat posed by increased interest rates as Canadian household debt grows to record levels.
In January, Flaherty announced new mortgage rules aimed at slowing household debt and reducing taxpayers' risk. The rules, which come into effect March 18, will cut the maximum amortization period for a mortgage to 30 years from 35, and restrict the amount buyers can borrow when refinancing to 85% of the value of homes, down from 90%. In addition, the government would withdraw backing for lines of credit secured by people's homes.
These rules follow changes last year that required borrowers to meet lending standards for five-year fixed-rate mortgages, even if the buyer wanted a shorter-term, variable-rate loan.
Canadians who are worried about impending interest rate hikes should look for ways to reduce their overall housing costs, including shorter amortization periods, which can reduce the amount of interest paid over the life of the mortgage, say experts.
Other tips for those who may be put in an uncomfortable position by rate hikes include opting for a fixed-rate mortgage.
Variable-rate mortgages can save you big money over the long term, the bank says, but if you're afraid your income won't keep up with interest rate hikes, fixed-rate mortgages "provide the peace of mind of insulating you against rate increases and the certainty of knowing how much of your mortgage you will have paid down at the end of your term."
Also, putting more money on the table for a downpayment reduces the size of your mortgage and the amount of interest you'll have to pay. And if you can put down at least 20%, you avoid paying for mortgage default insurance.
