One mistake people make is trusting the lender to tell them if they can afford the loan
Tara Perkins
Sun
TORONTO — Interest rates are ratcheting up and many Canadians will feel the pinch as loan and mortgage rates follow suit.
“Canadians are in a very precarious situation as it is,” says Laurie Campbell, program manager at the Credit Counselling Service of Toronto.
Gas prices, home heating costs and property taxes are all on the rise, she notes.
More significantly, the national savings rate has dipped into negative territory for the first time in decades, meaning Canadians are spending more than they earn.
“With interest rates on the rise, it could have a big impact on many people,” Campbell says.
This week, the Bank of Canada raised its trend-setting interest rate by a quarter-point, to three per cent.
On Thursday, Governor David Dodge warned that the Canadian economy is growing enough that further rate hikes are warranted.
While fixed mortgage rates are determined by the bond market, variable rates rise along with the prime rate.
That means that, following almost a decade of record low interest rates, mortgages are now in line for a shakeup.
As Canadians have been depleting their collective savings, they have been gorging on mortgages. Low interest rates helped fuel the appetite for real estate.
Residential mortgages now account for about one-third of all credit to households and businesses, according to a study released this week by the Canadian Institute of Mortgage Brokers and Lenders.
Mortgage credit has increased by 9.4 per cent annually for the past two years. In the second quarter of this year there was $617 billion in residential mortgage credit outstanding.
So far, Canadians have been keeping up with the rising mortgage debt load. Only 0.25 per cent of mortgages are in arrears, compared with 0.5 per cent during the 1990s.
But Andrew Innisf, general manager of Solutions Credit Counselling Service Inc. in Surrey, says many consumers are overextended because of the eased lending environment of recent years.
A lender’s priority is “to make the mortgage work,” he says. “And that’s where people can run into trouble, because they trust the lender to tell them whether or not they can afford the loan.”
Benjamin Tal, senior economist with CIBC World Markets, says “many households operate on a very narrow margin and don’t have much room to manoeuvre.”
They will feel even a modest increase in interest rates significantly, he says, “especially given the fact that 30 per cent of homeowners have variable rate mortgages.”
Variable-rate mortgages have enjoyed rising popularity lately. While 31 per cent of Canadian mortgage holders have them, 37 per cent of people who took out a mortgage in the last year chose a variable rate, the brokers’ institute study says.
But at the same time that mortgage interest rates are rising, the spread between short-term and long-term mortgages is dwindling, it adds. The premium that consumers pay to lock-in a fixed rate is decreasing.
That may encourage a shift away from variable mortgages, the study says.
Tal’s advice to those with variable rates is don’t panic.
“I think over the next two to three years, if you look at variable versus fixed, you will find that the difference is not very significant,” he says.