The hurt of higher mortgage rates...
The crux of the concern in Ottawa and on Bay Street is the impact that rising rates will eventually have on highly leveraged homeowners.
“We know that interest rates will rise – the only question is when,” Mr. Tal says. “Even if you lock in a five-year mortgage rate, you have to realize that five years from now, they will be significantly higher than they are now. Clearly people have to be much more prudent in this kind of environment.”
Bank of Canada Governor Mark Carney reiterated this week that his overnight target likely will remain at 0.25 per cent until next June. But central banks in Israel, Australia and Norway have begun reversing their extraordinary easing cycles amid signs of incipient inflation and some concern that asset prices, including real estate, are getting a little too hot.
Central bankers in the U.S. and elsewhere have also indicated in recent months that once they decide it's time to begin raising interest rates, they may do so at a faster pace than consumers and investors are used to.
While heftier debt loads obviously make all borrowers more vulnerable to higher interest rates, consumers' increased exposure to real estate also means that they have become more susceptible to changes in the housing market.
Broker Darin Bauer says most of his current customers are making down payments of only 5 or 10 per cent, and “not too many” come forward with the 20 per cent down payment that is the minimum to avoid the federal government's otherwise mandatory mortgage insurance.
“Generally, when they're doing the 5 per cent down, they're close to the maximum of affordability ratios,” Mr. Bauer said. “If rates went up significantly, it could be a problem come renewal time.”
Consumers with fixed-rate mortgages might feel secure. But with many mortgages now having a 35-year amortization, they are bound to feel the pinch of higher interest rates at some point.
“Consumers have to think very carefully about what they're going to do in five years when interest rates are higher,” says Peter Aceto, the CEO of ING Direct Canada. The financial crisis crimped property markets around the world, but Canada's eight-month housing correction is now a distant memory.
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