Our Interest in Rising Rates
Many Canadians today are opting for variable rate mortgages. What happens to the economy
if interest rates rise and homeowners cannot pay? by David Descôteaux
illustration by Harry Campbell/iSpot N
OBODY KNOWS EXACTLY WHEN INTEREST RATES will go back up, but we will have to face a rise sooner or later. The problem is that Canadians are carrying more debt than ever, and the housing market, a key economic driver for many
years, is showing signs of slowing down, as even the most optimistic forecasters now call for modest growth in house prices for 2015 and a so-called soft landing. The Canadian economy has been bolstered by the low interest rates of recent years, and now it depends on them to function. What would happen if rates began climbing by one, two or
even three percentage points? What would be the effect on the housing market? How many Canadians would no longer be able to pay their mortgages? Even the governor of the Bank of Canada, Stephen Poloz, recently admitted in a CBC interview that Canadians have taken on so much debt that any uptick in interest rates could send shock waves through the economy. Does our economy depend on low interest rates? And how much of an increase could it withstand without collapsing?
Very little wiggle room Consider the following: you just purchased a house for $350,000. If you made a $35,000 down payment and obtained a 25-year mort- gage with a variable interest rate of 3%, your
monthly payment is $1,530. If by some misfortune the inter- est rate rises to 5%, your payment will then be $1,886 (see p. 43). Will you be able to find the additional $356 each month? “People are becoming increasingly dependent on the Bank
of Canada’s key interest rate [which influences the banks’ prime rates]. This phenomenon is striking because people are now looking for the lowest payments even if for a shorter period of time,” says Stéphane Bruyère, a broker at Mortgage Architects in Montreal. “Currently, 80% of my clients opt for variable rates. When a variable rate hovers around 2% or 3%, very few people want a fixed five-year rate, and fewer still want a 10-year rate, even if it is barely above 4%.” Elena Jara, director of education at Credit Canada Debt Solutions, recalls when interest rates rose by a quarter of a
40 | CPA MAGAZINE | MARCH 2015
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