27 July 2011

Mr. Lascelles also added: “Today many people believe that the Bank of Canada can’t raise interest rates, as it would be a real strike for mortgage borrowers. Actually, it’s quite the opposite. The central bank can’t afford to keep the rates so low. The problem is that the longer rates don’t rise, the more marginal borrowers will enter the market. In the end, the majority of them will face great difficulties with their payments when the rates finally go up”.
The chief economist suggests that once the Bank of Canada raises its key lending rate, the situation will get better: rising mortgage costs and other debts will reduce the consumer spending. In addition to it, real estate prices will go down, because many buyers will have to leave the market due to decreasing affordability level.
Moreover, Mr. Lascelles’ report says that in spite of the high household debt level measured against income (record high 147%), only a small portion of Canadian borrowers are really vulnerable to higher interest rates.
Today many Canadians even have spare spending capacity to afford rising mortgage costs. Many of them also pay more on their monthly payments than required, so they have the room for a reduction if it’s necessary.
It should also be noted, that about two thirds of Canadian mortgage holders chose fixed-income mortgages. In case of an average five-year term, the majority of them will enjoy a reduction of rates when their mortgages roll over, Mr. Lascelles said. By 2015, we’ll probably see higher rates, but this impact will be compensated by three years of increasing household incomes.
It’s the variable mortgage holders who may face more risk when the rates go up. But even here, the majority got their mortgages before rates fell this low, so rising tendency would just bring them back to where there were at the beginning.
In other words, the consequences of rising rates “will likely affect a small portion of households, but won’t cause such a systemic damage” as in case of the United States.

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