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% believe an increase -- for example, to 5% from 3% -- 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% from 3.49% and other banks followed.
Since then, Royal, TD and National banks have announced their five-year posted rates will go up today to 5.44% -- an increase of nearly 2.5 percentage points from the sale price.
One in five Canadians surveyed said a two-percentage-point rise would hurt his or her ability to make mortgage payments, while 23% 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% -- compared with $2,990 at a rate of 2.99%.
The study, which surveyed some 1,500 Canadians in February, also found 57% of respondents believe they could still afford their home if interest rates spiked two per cent.
The report has a 2.5% margin of error 19 times out of 20.
Provincially, Alberta households scored the strongest on the stress test with 73% saying they could afford their mortgage if it went up two percentage points. Manitoba and Saskatchewan were second at 69%.
B.C., which has the most expensive homes in the country in Vancouver, had the worst record. Only 48% of households said they could still afford their home if interest rates were to climb by two percentage points.
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 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 Bank of Canada governor Mark 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%.
An increase of two percentage 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, said one expert.
The fear is they are not budgeting for the inevitability of interest rate hikes, she added.
The Bank of Canada tends to raise rates in 25-basis-point increments that are unlikely to change rapidly, but a gradual increase by two full percentage points over five years would be realistic, she said.
