Debt-laden homeowners face threat of rate increases

By Derrick Penner, Vancouver SunDecember 17, 2009

Homeowners are being warned any rise in interest rates risks putting a financial squeeze on the large number of debt-laden Canadians who took out variable mortgages at rock-bottom rates.

“Canadians are potentially leaving themselves wide open for significant financial obligations once interest rates begin to rise,” the Mortgage Brokers Association of B.C. said in a statement Wednesday.

This was on top of a warning from Bank of Canada Governor Mark Carney that Canada “must be vigilant” in containing the threat rising rates would have on increasing the debt-servicing costs for Canadians who have taken on increasing levels of debt.

Carney’s advice was delivered a week after he first voiced concern about the high levels of debt Canadians are carrying. It comes in the wake of bold predictions from economist and author Jeff Rubin that the jump in rates could be as steep as three to four percentage points over the next two years as the Bank of Canada raises rates to keep inflation caused by increasing energy costs in check.

Canada Mortgage and Housing Corp. and the B.C. Real Estate Association are both forecasting mortgage rates will edge up more modestly and slowly in 2010.

However, the increase suggested by Rubin could add up to $1,000 a month to the payment on a typical-for-Metro-Vancouver $400,000 mortgage.

Future interest rates depend on whether inflation takes hold quickly, with many arguing that Canada’s still-weak economy shows few signs that it will.

However, the Mortgage Brokers Association of B.C. estimates that some 40 per cent of homebuyers are taking variable mortgages with interest rates that flow with bank prime lending rates.