Nearly one in four homeowners with a mortgage say they may have to sell if rates keep rising

Nearly one in four homeowners with mortgages, or 23 per cent, believe they may be forced to sell if interest rates increase further, according to a new survey released Monday by Manulife Bank.

The report, which surveyed more than 2,000 Canadians, also found that 18 per cent of individuals with a mortgage already feel they can no longer afford the home they own, citing rising interest rates, inflation, or the overall cost of living.

“There’s definitely concern in the marketplace,” said Lysa Fitzgerald, vice-president of sales at Manulife Bank. “Canadians are feeling not as in control as they’d like to be, and perhaps some don’t really have a strong sense of what an increase in interest rates and inflation mean to their specific budget and cash flow.”

The survey also found Canadians’ debt load is increasing, with 50 per cent of respondents claiming their spending is now outpacing their income, up from 35 per cent a year ago.

“This large statistical increase that is observed relative to previous waves is likely attributable, in no small part, to rising interest rates and inflation,” the report reads.

Earlier this month, the Bank of Canada announced it was raising its target for the overnight rate to 1.5 per cent, an increase of half a percentage point. The June announcement came after a similar half-point hike in April. Experts expect additional increases to the overnight rate this year, after nearly two years of exceptionally low interest rates throughout the pandemic.

While the Bank of Canada does not set mortgage rates, variable-rate mortgages and home equity lines of credit are closely pegged to the bank’s overnight rate (fixed-rate mortgages are typically tied with the bond market).

Ian Calvert, vice-president and principal at HighView Financial Group, said a combination of low interest rates along with the increase in home values over the past few years encouraged a lot of debt among Canadians.

“Debt levels got really high over the last couple of years,” he said. “But that party is now over as the cheap money and really low interest rates have come to an end.”

Calvert said it will be challenging for some Canadians to service this amount of debt. “Those low rates will not last forever, as they were artificially low to stabilize and support the economy during the global pandemic,” he said.

Simeon Papailias, a real estate agent and co-founder of REC Canada, said about eight in 10 home buyers he has dealt with over the past two years have taken advantage of the low interest rates and signed a variable-rate mortgage. However, he said more clients are now inquiring about locking in fixed-rate mortgages, especially as interest rates continue to increase.

Papailias does not expect the higher mortgage rates will affect the majority of Canadians in terms of their ability to pay off their mortgage.

“Our banking system is extremely conservative,” he said. “We are nowhere near what these homeowners were stress-tested against when their mortgages were approved.”

Mary Sialtsis, a mortgage broker with Concierge Mortgage Group, said Canadians’ perceptions may not be matching reality.

“After the Bank of Canada raised its rates by half a per cent, I had a client who was under the impression that his mortgage payment was going to go up by $1,000. In actuality, it’s $120 a month, which is still an amount of money, but certainly not $1,000,” she said.

In 2017, an average five-year fixed mortgage rate was around 2.89 per cent, Sialtsis said, noting if you had a $500,000 mortgage, you were paying about $2,338 a month. Now, with rates at about 4.5 per cent, you can expect to pay about $2,688 for a 20-year amortization. “It’s not that much higher,” she said, “because when you started five years ago, you owed $500,000 whereas now you only owe $426,000, so the mortgage payment is being calculated on a lower base.”

Janet Gray, a financial planner with Money Coaches Canada, said though mortgages rates have increased, they are still reasonable, “especially when you can still get a mortgage for less than five per cent, even though interest on your credit card is at 20 per cent.”

Don’t panic, she said. Instead create a plan for how to deal with increasing mortgage rates.

“For some people, there’s no reason to stress but they feel that they should because everyone else is,” she said. “Know yourself, know your rules, know your situation and know what your outcomes could be.”

With files from Rosa Saba

SHARE: