Mortgage Payment Growth

As an MNP LTD Trustee and a member of our Surrey, B.C Team, Judy Scott recently came across the following two articles in the Vancouver Sun and Huffington Post and felt it would be advantageous to our clients to respond.

According to statistics published by Canada Mortgage and Housing Corporation, residential mortgage rates are the lowest we have seen in over 63 years. This has allowed more people to qualify for a mortgage and caused more demand in the housing market, meaning that housing values have increased.

However, interest rates can't go much lower. There are concerns that when rates begin to rise, Canadians will begin to have difficulty meeting their debt payments.  That will eventually lead to an increase in foreclosures and a drop in housing values. When rates begin to rise, it will become more expensive for Canadians to service their credit card, mortgage and other debts, particularly if they are on a floating rate.

While the amount of debt held by Canadians is at a historic high, the value of assets held by Canadians has also increased, partly due to the overheated housing market and purchasing demand in other sectors.  

Some suggestions for surviving increased mortgage rates: 

• Do a budget. Look at how much money you have each month to pay against your debt.  Make a decision to spend on necessities and not on discretionary things at least until your revolving credit debts are paid.
• Start paying off your credit cards and lines of credit now. Because interest rates are so low, more of your payment will go to reducing your principal.  
• Make sure what you owe on your credit card and lines of credit going down every month rather than up - stop using them and keep paying them.
• Don't be tempted by offers to increase your credit limit.

Here’s a comprehensive look at how an interest rate increase could affect the average Albertan’s monthly payments:

An average Alberta mortgage debt of $321,700 with a 25-year amortization and a floating rate of 2.25% would be $1,403.04 monthly. With a 0.5% increase in interest rate, this would jump to $1,484.04, an increase of $972 more per year.  

An average Canadian car loan of $19,720 at 5% now with a 5 year payment plan would currently have monthly payments of $372.14. If interest rates were to rise to 5.5%, they would then increase to $376.67, $54.36 more per year.

The average Canadian credit card debt of$3,720 at 18% has monthly payments of $55.80. At 18.5%, monthly payments would then shift to $57.35, an increase of $18.60 per year.  

For this household with debt of $345,140, the total increase in monthly costs would go from $1,830.98 to $1,918.06 which is $1,044.96 more in interest payments per year.   “With the household debt-to-income ratio in Canada currently at a record high of 162.6%, many people can’t afford even small increases to their monthly payments. Add to this the possibility layoffs, Canadians need to be preparing financially,” says Ms.Scott.