Monday, April 16, 2012

Second Look: Canadian Homeowners’ Sensitivity to Interest Rates

Writing this blog has taught me a lot about personal finance and investing. This is one of a series of articles where I argue with my former self by disagreeing with one of my previous articles. Unlike politicians, I’m allowed to change my mind as I learn more from my readers and my own research.

I wrote about Warren Buffett’s proposed solution to preventing a repeat of the U.S. housing crisis and in the comments section, I crowed

“I'm proud of the Canadian system and its stricter policies for obtaining a mortgage that has pretty much dampened any housing bubbles that we might have.”

I’m not so sure about this any more. I don’t think we’re headed for a mortgage crisis anywhere close to as bad as what happened in the U.S. a few years ago, but it seems clear now that many Canadians would be in for trouble if interest rates rose by even as little as 2%.

On a $300,000 mortgage amortized over 30 years, 3% interest gives monthly payments of about $1260, but 5% interest leads to $1600 payments. This could easily push some homeowners who are right on the edge into default (or at least force them to sell their homes).

I’m not making any predictions about the extent of the pain we’ll see throughout the economy when interest rates start to rise again, but it won’t be fun for those who are heavily indebted.

On the Positive Side …

Here are a few of my older articles that I still quite like:

Market timing in pictures.

MER: Death by 1000 cuts with pictures!

With some dialogue I show that MERs are the gift that keeps on giving.

A profitable, but potentially very dangerous 6-figure credit card arbitrage scheme.

How lenders juice interest payments by not using real interest rates.

A look at how the steady rise of stock prices gets lost in the noise.

Making large sums of money last requires surprisingly low spending each month.

Improving incentives for real estate agents to better align their interests with the clients’ interests. This one had some good discussion in the comments section.


Lacking a sense of scale can hurt financially.

5 comments:

  1. Well interest rate is really hurt for everybody specially if the interest is really high.This is really good article.Love it.

    ReplyDelete
  2. With interest rates being so low, don't you think the government will only raise them a small amount to slow the economy if it ever gets going. I mean a 1 percentage point increase on 3% is quite substantial.

    ReplyDelete
  3. @anonymous: I think that interest rates are likely to be raised by less than 1% at a time, but they could easily go back up substantially over time.

    ReplyDelete
  4. Interesting article on cbc.ca on "subprime" mortgages in Canada. No, it's not the same subprime that sank the US housing market, but it's growing in Canada. I still don't think we can explode here so soon after the US explosion. Too many people still remember how things went bad so quickly that that's probably why we'll avoid it.
    Here is the link: http://www.cbc.ca/news/business/story/2012/04/16/subprime-mortgage-market.html

    ReplyDelete
  5. @Larry: Thanks for the pointer to the interesting article. It seems we're a long way from the scale of the U.S. problems, but we're headed in that direction.

    ReplyDelete