Could you afford a $500 increase in monthly mortgage debt?Oct 15, 2015
When the interest rate on your mortgage starts to rise, can you keep up with the payments? According to a new survey from the Bank of Montreal, 16 per cent of Canadians could not afford a $500 increase in their monthly mortgage payments. Another 27 per cent would need to review their budget in order to pay down the additional mortgage debt. To put things in perspective, a $500 increase could come from a mere 3 per cent rate hike on a $300K mortgage over 30 years.
A 3 per cent rate hike likely wouldn’t happen overnight, but even a much smaller increase could affect many Canadians. In June, Manulife Bank of Canada found that more than one-third of Canadians would struggle if their mortgage debt increased by 10 per cent, which would come from a 1 per cent rise in rates on a $200,000 mortgage. What’s more, the same survey found that 15 per cent of homeowners couldn’t afford any increase at all in their mortgage.
Unfortunately, with the Bank of Canada overnight rate now at 0.5 per cent, rates really can’t get much lower for those struggling to make mortgage payments. That said, most economists aren’t predicting a rate hike until 2017, and while some do see it happening as soon as next year, that still gives Canadians time to pay down debt before rates rise.
It is worth noting that those who “locked in” their mortgage rates with a fixed-rate mortgage do not need to worry about mortgage payments increasing along with interest rates. However, those who opted for lower-interest, variable-rate mortgages, have other loans with variable rates, or will be looking to renew a mortgage that’s nearing the end of its term, would be affected once rates rise.
Paying down debt at lower rates could also reduce stress for some Canadians. While Bank of Montreal’s annual debt report found that 46 per cent of Canadians feel “some stress” about their debt, that number increased to 64 per cent who would be stressed if interest rates rose by 2 per cent. But Canadians seem to be about as optimistic as many economists, as 46 per cent said they plan to add to their debt in the coming year.
There is definitely a debt disconnect here. If a rise in interest rates would cause a subsequent increase to stress levels, it would make most sense to pay down debt at lower rates, not take on more debt. With Canadians carrying an average household debt of $92,000, it would not take a very large increase for many to start feeling the heat when it comes to their mortgage payments.
Fortunately, the Financial Consumer Agency of Canada (FCAC) offers several tools and calculators for Canadians who could use help in paying down debt. They even have a page that discusses the impact of interest rate increases on your mortgage and other forms of debt.
Mortgage Qualifier Tool: Allows you to enter mortgage details such as the interest rate, amortization period (length of mortgage) and payment frequency. You’ll also input your anticipated expenses such as heating, taxes and debt payments to determine if you can qualify for a mortgage.
Mortgage Calculator Tool: By entering the same mortgage details as the mortgage qualifier tool, along with your prepayment amount and prepayment frequency, you will be provided with a mortgage payment schedule and find out how much you could save by making prepayments.
Credit Card Payment Calculator: Shows how you can reduce interest payments with three different options for paying off your credit card debt.
While the Bank of Canada might not raise interest rates within the next year, it would be best to get ahead of any increase and pay down your mortgage debt, rather than taking on more debt. And this doesn’t just apply to your mortgage, either. Paying off “bad debt” such as credit cards with high interest rates should also be a top priority, to help reduce the stress brought on by higher mortgage payments. Recent surveys have shown that many Canadians couldn’t cope with the financial burden of rates rising by a couple of percentage points, nor with the stress that would come with such an increase. So you’ll reduce both your debt and your stress levels by starting to pay down debt today.