Homeowners face hardship if rates rise

475,000 vulnerable; Variable-rate mortgages most at risk, study says.

A new report from the country's mortgage brokers suggests up to 375,000 Canadians with home loans are "challenged" by current rates and that figure would more than double if interest rates climb to 5.25%.

The report comes on the same day Canada Mortgage and Housing Corp. said builders continue to ramp up their activity with new-home construction surpassing the 200,000 level in April on a seasonally adjusted annualized basis -- levels not seen since 2008.

"I think overall the message is that we are being prudent and doing well. There are a lot of stats to support that," said Jim Murphy, chief executive of the Canadian Association of Accredited Mortgage Professionals, whose study done in April found a further 475,000 mortgage holders would have trouble making payments if rates rose to 5.25%.

The group says there are 9.3 million homeowners in Canada and about 5.55 million have mortgages. Of particular concern is the number of consumers with variable-rate mortgages, now as low as 1.75%, who could be affected if rates rise.

Last month, the government moved to push people into fixed-rate mortgages by requiring anybody borrowing for a term of less than five years to qualify based on the posted rate -- now 6.1%. Consumers who lock in for a term five years or longer can qualify based on the rate on their actual contract.

The CAAMP survey found that while 65% of those borrowing have gone to a fixed rate, 29% still remain variable, with the rest having a mixed mortgage. Of the 475,000 who could be vulnerable if rates rise, 275,000 are in variable rates.

"They have the option to lock in," said Will Dunning, CAAMP chief economist, who added that in a rising rate environment their option to get a rate below 5.25% could be fading.

Mr. Murphy said other information in the report doesn't paint a picture of a reckless consumer. The survey found 13% of borrowers made a lump-sum payment over the past year, totalling $7.8-billion, about 1% of the total mortgage debt outstanding.

Consumers have also been more cautious about tapping into their home equity. About 11% of borrowers withdrew $20-billion of equity from their homes in the past year, a drop from the $34-billion for the same period a year earlier.

The survey also found 93% of mortgage holders have never missed a payment. Of the 7% who failed to make a payment, the majority did so in the past year.

"The very high percentage of Canadians who have never missed a payment confirms that Canadians take their mortgage obligations seriously," Mr. Murphy said.

The rising rate environment may soon hit the new-home market, which has flourished because of low rates.

The housing market also continues to get a boost from consumers hurrying to buy homes in Ontario and British Columbia before new taxes kick in. "A rush to contract --and in some instances build -- before the July 1st implementation of the harmonized sales tax in Ontario and British Columbia will lead to some payback in activity after the deadline passes," said Pascal Gauthier, an economist with Toronto-Dominion Bank.

(prepared by Garry Marr/Financial Post/National Post)