Amid rising rates, most Canadians don’t plan to stress-test their mortgages

The potential for rising interest rates doesn’t seem to be dampening Canadians’ homebuying plans.

Nearly one-quarter (23%) of Canadians surveyed say they still plan to buy a home as their primary residence in the next year, for an average expected price of $474,000, says a BMO report. That price rises for the big markets of Toronto and Vancouver—to $580,000 and $603,000, respectively.

Though about three-quarters of Canadians (76%) believe interest rates will go up soon and continue to rise, more than half (53%) aren’t preparing for those scenarios by stress-testing their mortgages to ensure they can afford their financial commitment over the long term.

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Regionally, more than half of buyers based in Ontario and British Columbia will stress-test their mortgages (53% and 51%, respectively), compared to a maximum average of only 40% across all other regions, finds the report.

Those who don’t stress-test could be surprised by increased borrowing costs.

“Even moderate increases in interest rates, like the two additional quarter-point rate hikes that we expect from the Bank of Canada this year, can erode affordability in high-priced regions,” says Sal Guatieri, BMO senior economist, in a release. “Given that rates have been historically low for a while and are not expected to increase dramatically, borrowers may not see the need to stress-test. But they should at least plan for a worse-case scenario that involves a material increase in borrowing costs.”

Fixed or variable rate?

Canadians prefer fixed-rate mortgage options, with 69% of homeowners having a fixed rate and only 14% of new buyers wanting a variable rate.

However, when asked if expected changes to interest rates impact their choice, more than half of first-time homebuyers (51%) still believe that the type of mortgage they choose will ultimately depend on the base rates being offered for each.

“It’s encouraging to see that Canadians are thoughtful about weighing their mortgage options based on rate, but it’s equally important that they consider how their choice will affect their day-to-day finances,” says Martin Nel, head of personal banking at BMO, in a release. “For example, a customer who likes the certainty of knowing exactly how much of their monthly payment is going to principal versus interest may not be the best fit for a variable mortgage even at a lower starting rate.”

And many prospective buyers overlook specifics related to how their mortgages are structured.

In particular, those who opt for a variable rate often aren’t aware of details like whether the payment amount or just the interest/principle ratio will change in the event of a hike. Many also need to understand that if they decide to lock in, their new rates will be determined by what is currently being offered in the market and not on the addition of basis points to their original rates.

About the survey: The homebuyers survey was conducted online by Pollara Strategic Insights between March 16 and 22, 2018, with a sample of 1,509 Canadian. Data have been weighted using the latest Canadian census information to be representative in terms of age, gender and region. The margin of error is ±2.5%, 19 times out of 20.

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