1 in 6 can’t afford $500 mortgage payment increase

27% would need to review their budget

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OTTAWA – Nearly one in six Canadians would not be able to handle a $500 increase in their monthly mortgage payments, a new survey from the Bank of Montreal suggests.

According to the bank, 16 per cent of respondents said they would not be able to afford such an increase, while more than a quarter, or roughly 27 per cent, would need to review their budget.

Another 26 per cent said they would be concerned, but could probably handle it.

Such an increase would be generated in the case of a three percentage point hike in interest rates — from 2.75 per cent to 5.75 per cent — on a $300,000 mortgage with a 25-year amoritization period.

Given that interest rates are likely to increase in the foreseeable future, the bank said there was no better time to put together a detailed debt management plan.

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“The ultimate goal of most Canadians should be the elimination of debt, but the first step needs to be getting rid of bad debt, which has the potential to destabilize a household’s financial situation,” said Chris Buttigieg, senior manager of wealth planning strategy at BMO.

“A financial professional can help you avoid having your debt lead to long-term financial instability and work with you to develop a plan to sort out your balance sheet as quickly and efficiently as possible.”

A report by Statistics Canada last month found the ratio of household credit market debt to disposable income climbed in the second quarter of 2015 to 164.6 per cent, up from 163.0 per cent in the first three months of the year.

That means Canadians owed nearly $1.65 in consumer credit and mortgage and non-mortgage loans for every dollar of disposable income.

The report by BMO’s Wealth Institute found that almost half of Canadians, 47 per cent, believed that the high level of debt in Canada has been influenced by soaring real estate values, while 40 per cent believed it has been influenced by low rates.

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Interest rates, including mortgage rates, have been near historic lows. The Bank of Canada has cut its key interest rate twice this year in an attempt to boost an economy hobbled by a sharp drop in commodity prices.

BMO noted that when interest rates are low it is a good time to make aggressive principal repayments on loans and its survey found that 35 per cent of those asked are looking to pay down their mortgage sooner.

“However, statistics have shown that debt service rates have not changed very much from the early 1990s, when interest rates were much higher,” the report said.

“It appears that many Canadians have used low interest rates to get larger loans on more expensive houses rather than to aggressively repay their debt.”

The online survey was conducted by ValidateIt for BMO from June 23 to 29, with a sample size of 1,014 Canadians.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.

2 comments on “1 in 6 can’t afford $500 mortgage payment increase

  1. Necessary and savage rate hikes aren’t that far away. Here’s why:
    Larry Elliott
    BBC Economics editor
    Sunday 28 June 2015 17.07 BST

    The international body that represents the world’s central banks has issued a stark warning that an unprecedented period of ultra-low interest rates mask deep weaknesses in the global economy and threaten to be the trigger for the next financial crisis.
    In its annual report, the Basle-based Bank for International Settlements says that what used to be considered “unthinkable” risks becoming the “new normal”, with clear risks for future stability.
    BIS said the need for abnormally low level of interest rates to be kept in place six years after the trough of the global financial crisis in early 2009 reflected a broader malaise.
    It added that monetary policy – the willingness of central banks to print money and keep borrowing costs low – was bearing too much of the burden and that governments needed to rely more on structural reform to secure sustainable growth.
    BIS was the one global body to point out in advance of the financial crash of 2007 that booming asset prices could cause problems even during periods of low inflation, and its latest warning will be seen as a call for its central bank members to start returning monetary policy to more normal settings.
    “Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark”, the report said.
    “Such low rates are the most remarkable symptom of a broader malaise in the global economy: the economic expansion is unbalanced, debt burdens and financial risks are still too high, productivity growth too low, and the room for manoeuvre in macroeconomic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal.”
    The US Federal Reserve is likely to be the first central bank in any major advanced country to raise interest rates. Wall Street expects the Fed to tighten policy later this year, with the Bank of England forecast to follow in 2016. The European Central Bank and the Bank of Japan are currently still using quantitative easing – the creation of electronic money – to boost activity.
    BIS noted that it was proving “exceedingly difficult” to understand the malaise affecting the global economy, but said the problem stemmed from a failure to come to grips with financial booms and busts that left deep and lasting scars.
    “In the long term, this runs the risk of entrenching instability and chronic weakness. There is both a domestic and an international dimension to all this. Domestic policy regimes have been too narrowly concerned with stabilising short-term output and inflation and have lost sight of slower-moving but more costly financial booms and busts.
    “And the international monetary and financial system has spread easy monetary and financial conditions in the core economies to other economies through exchange rate and capital flow pressures, furthering the build-up of financial vulnerabilities. Short-term gain risks being bought at the cost of long-term pain.”
    BIS added that far from being the solution, persistently low interest rates risked becoming the problem. “Rather than just reflecting the current weakness, low rates may in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates.”
    As evidence of its thesis, BIS said that between December 2014 and the end of May 2015, on average around $2tn (£1.27tn) in global long-term sovereign debt, much of it issued by euro area sovereign states, was trading at negative yields.
    At their trough, interest rates on French, German and Swiss bonds were negative out to a respective five, nine and 15 years, with the result that investors were paying for the privilege of holding government debt.
    “Such yields are unprecedented”, BIS said. “Yet, exceptional as this situation may be, many expect it to continue. There is something deeply troubling when the unthinkable threatens to become routine.”

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  2. Besides not being able to afford a $500 increase in monthly mortgage payments, how much money will that household lose decades from when they retire.

    Contributions of $500 a month in RRSP’s would create about $150 a month in annual RRSP income tax refunds. This combined $650 a month earning a modest 4% a year compounded over 25 years would be about $325,000. Assuming there is another 10 years to retirement, this would be $481,000 in RRSP’s.

    This is just the mortgage payments increasing $500 a month but what about all the extra property taxes, utilities, insurance, repairs and maintenance, CMHC fees, H.S.T. on most of these etc. etc. plus all the annual increases of these for decades.

    This would easily add up another $1,000,000 or more in lost RRSP’s, TFSA’s, non-registered money etc. This brings the total to at least $1,500,000 less for retirement and at least $60,000 a year less retirement income.

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