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BMO Spring Housing Report: Amid Rising Rates, More than Half of Canadians Don't Plan to Stress Test their Mortgage
  • One quarter of Canadians plan to buy a home within the next year
  • Canadians expect to spend an average of $474K, with those in Toronto and Vancouver exceeding that target by +$100K
  • Ontarians and British Colombians most likely to stress test their mortgages

TORONTO, May 2, 2018 /CNW/ - According to a new BMO report released today, the prospect of rising interest rates does not seem to be dampening the home buying plans of Canadians. Nearly one quarter (23 per cent) are still planning to buy a home as their primary residence in the next year, for an average expected price of $474,000. That figure rises for the big markets of Toronto and Vancouver to $580,000 and $603,000, respectively.

Furthermore, over three quarters of the country (76 per cent combined) believe interest rates will go up soon and continue to rise. However, more than half of Canadians (53 per cent) are not preparing for those scenarios by stress-testing their mortgages to ensure they can afford their financial commitment over the long term. Over half of buyers based in Ontario and British Columbia will stress test their mortgages (53 per cent and 51 per cent, respectively), compared to a maximum average of only 40 per cent across all other regions.

"For the first time in years, interest rates are beginning to rise – making it increasingly important for Canadians looking to buy a home to stress-test their mortgage against a higher rate to ensure they can afford it over the long term," said Martin Nel, Head, Personal Banking, BMO Bank of Montreal. "We encourage homebuyers to familiarize themselves with the tools available to them and speak with a mortgage specialist who can help plan all aspects – both long term and short term – of what will likely be the biggest purchase of their life." 

Mr. Nel added that even those planning to lock in a rate with a fixed mortgage still need to be mindful of the terms to follow over the entirety of their amortization, and other factors like monthly insurance payments depending on the size of their down payment.

"Even moderate increases in interest rates, like the two additional quarter-point rate hikes that we expect from the Bank of Canada this year, can erode affordability in high-priced regions," said Sal Guatieri, Senior Economist, BMO Capital Markets. "Given that rates have been historically low for a while and are not expected to increase dramatically, borrowers may not see the need to stress test. But they should at least plan for a worse-case scenario that involves a material increase in borrowing costs."

Deciding Between A Fixed Versus Variable Mortgage
Canadians' preference of mortgage leans in favour of fixed rate options, with 69 per cent of home owners having a fixed rate, and only 14 per cent of new buyers wanting a variable rate. However, when asked if expectations of changes to interest rates impacts their choice, more than half of first time home buyers (51 per cent) still believe that the type of mortgage they choose will ultimately depend on the base rates being offered for each.

"It's encouraging to see that Canadians are thoughtful about weighing their mortgage options based on rate, but it's equally important that they consider how their choice will affect their day-to-day finances," said Mr. Nel. "For example, a customer who likes the certainty of knowing exactly how much of their monthly payment is going to principal versus interest may not be the best fit for a variable mortgage even at a lower starting rate."

Mr. Nel added that many prospective buyers overlook specifics related to how their mortgage is structured. In particular, those who opt for variable often aren't aware of details like whether their payment amount or just the interest/principle ratio will change in the event of a hike. Many also need to understand that if they decide to lock in, their new rate will be determined by what is currently being offered in the market and not on the addition of basis points to their original rate.

Tips for Buyers Navigating the Housing Market

  • Take advantage of your pre-approval period: BMO now offers a 130 day mortgage rate guarantee period, the longest of any of Canada's major financial institutions, so you have time for due diligence with the home buying process.

  • Utilize free tools: an easy way to determine monthly costs is through BMO's mortgage payment & affordability calculators, which allow you to get a full picture of costs, and see how changes to variables like rate or payment frequency affect your payments. https://www.bmo.com/main/personal/mortgages/calculators/

  • Stress test against your rate: even if you've been approved for a certain rate that fits with your budget, it's important to factor in how that rate could change during your term, or come your renewal time.

  • Be informed of your mortgage terms: beyond fixed versus variable, determine factors like penalties for switching within your term and approved timeframes to increase payments or put down lump sums.

For more information on mortgage options and affordability tools, visit the new BMO Mortgage page at: http://www.bmo.com/main/personal/mortgages/new-mortgage-rules-stress-test/

The Home Buyers Survey was conducted by Pollara Strategic Insights via an online survey between March 16th and 22nd, 2018, with an online sample of 1,509 Canadian. Data has been weighted using the latest Canadian census information to be representative in terms of age, gender and region. The margin of error for a probability sample size of 1,509 is ± 2.5%, 19 times out of 20.

About BMO Financial Group
Serving customers for 200 years and counting, BMO is a highly diversified financial services provider – the 8thlargest bank, by assets, in North America. With total assets of $728 billion as of January 31, 2018, and a team of diverse and highly engaged employees, BMO provides a broad range of personal and commercial banking, wealth management and investment banking products and services to more than 12 million customers and conducts business through three operating groups: Personal and Commercial Banking, BMO Wealth Management and BMO Capital Markets.

SOURCE BMO Financial Group

For further information: Media Contacts: Matthew Duffin, [email protected], (416) 867-3996; Michelle Agnelo, [email protected], (416) 867-3996; Web: www.bmo.com, Twitter: @BMOmedia

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