Rising interest rates are pushing more homeowners to a place where they can no longer afford their mortgage payments, according to a new debt survey from Manulife Bank of Canada.
The online survey, conducted between April 14 and April 20, found that 18 per cent of homeowners polled are already at a stage where they can’t afford their homes.
Nearly one in four homeowners said they will have to sell their home if interest rates go up further. The Bank of Canada’s overnight rate indeed rose by half a percentage point to 1.5 per cent on June 2, six weeks after the poll was taken.
More than one in five Canadians expect rising interest rates to have a “significant negative impact” on their overall mortgage, debt and financial situation, the survey found.
Lysa Fitzgerald, Manulife Bank’s vice-president of sales, tells Global News that three hikes seen so far this year can already have a “significant impact” on a household’s monthly cash flow.
A family who might’ve been budgeting $2,600 a month on a variable rate mortgage at the start of the year, when rates were at the 0.25 per cent floor seen through most of the COVID-19 pandemic, would now be paying roughly $400 more a month since rates have risen 125 basis points, Fitzgerald says.
“The last two or three years, we’ve experienced very low interest rates. And many Canadians took advantage of being able to qualify for higher mortgages and took those,” she explains.
“And now (they) are finding themselves in a situation as rates are rising, can they really afford that?”
Isn’t this why we have a mortgage stress test?
Interest rates are not likely to hold at the 1.5 per cent mark for long, either. The Bank of Canada remains on a rate-hike path as it tries to tame inflation, which is now at a 31-year high at 6.8 per cent.
If Manulife’s survey is accurate, there could be a wave of new listings coming onto the market in June following the latest rate hike as worried homeowners seek to downsize or exit the market.
But John Pasalis, president of Toronto-based mortgage brokerage Realosophy, says there hasn’t been a flood of homes onto the market so far this month — he describes overall listing volume as “soft” right now as market activity moderates.
Pasalis says that homeowners should be insulated from a rapid rise in interest rates thanks to the federal mortgage stress test — “in theory.”
The mortgage stress test sees the vast majority of homebuyers — some credit unions or private lenders could be exempt, Pasalis notes — qualify for a mortgage rate of either 5.25 per cent or two percentage points higher than their actual rate, whichever is higher.
This helps ensure that their household income can afford higher monthly mortgage rates when interest rates do rise.
But for Canadians who rushed into the housing market during the pandemic on the promise of low mortgage rates at or below two per cent, the time to renew is fast approaching with rates around four per cent now the norm — potentially doubling their monthly payments.
“The mortgage stress test will certainly help some households. But for some households who are going to see their mortgage payment more than double over the next three or four years, they’re not going to be in a position to handle those additional payments, combined with the fact that many of the other costs in their lives, due to inflation, have gone up,” Pasalis says.
Close to half of indebted Canadians say debt is impacting their mental health, the Manulife survey showed, and almost 50 per cent of those surveyed say they would struggle to handle surprise expenses.
Leah Zlatkin, a mortgage broker and expert at lowestrates.ca, says even in the lean years, most household budgets should be able to accommodate even large jumps in the Bank of Canada’s interest rates.
She cites the mortgage stress test and the interest rate cycle as two measures of confidence for Canadian homebuyers worried about how high their monthly payments will go.
“This is kind of like a hill. You might be looking from the bottom of the hill, looking up right now and thinking to yourself, ‘Wow, I don’t know how high interest rates are going to go,’ but there is always a point at which the hill starts going back down,” she says.
“Trust in that you did qualify at a stress test and know that the crescendo of the hill is coming and soon things will go back the other way and you’ll feel a little bit of relief.”
Do homebuyers know what they’re getting into?
For first-time homebuyers who jumped into real estate during the pandemic, seeing rates rise for the first time could be a wake-up call and might even lead to some “buyer’s remorse,” as Manulife dubbed it in the survey results.
Zlatkin says there’s a “huge range of understanding” in Canada when it comes to the mortgage process. Some buyers, even those on the higher side of the income scale, might not know the difference between a fixed-rate or variable mortgage and how different models can affect the size of a monthly payment or length of time to pay back the loan.
Prospective homebuyers who are applying for a mortgage would be wise to ask advisors about what they should expect for the next three to five years, Zlatkin says. She puts the onus on brokers like her to break down the components of a mortgage agreement to their clients.
“We need to be very careful and cognizant that we’re asking the right questions as consumers to the people we’re working with for our mortgage. And we also need to be very concerned as professionals that we’re explaining all of the details to our client base,” she says.
Pasalis also says it’s not a surprise the typical homebuyer might be caught off guard by today’s surging rates, given the messaging from the central bank early in the pandemic that interest rates would stay at those rock bottom levels for a while.
“Our message to Canadians is that interest rates are very low and they’re going to be there for a long time,” Bank of Canada governor Tiff Macklem said in a speech in July 2020. At the time, the bank was maintaining its 0.25 per cent rate due to the “extreme uncertainty” of the COVID-19 pandemic.
“People make financial decisions based on what our leaders are telling us,” Pasalis says.
“I think part of the blame is on households, but at the end of the day, I don’t think those were promises that our policymakers should have been making to the first-time buyers.”
— with files from Global News’s Anne Gaviola and The Canadian Press