BMO Bank of Montreal

BMO Bank of Montreal

February 24, 2011 08:00 ET

BMO Mortgage Survey: Are Canadians Stress-Tested Against Rising Interest Rates?

- 2 in 3 Canadian homeowners say they will still be able to service their mortgage payments if interest rates go up

- However, 18 per cent do not think they can handle higher payments

- Rule of thumb dictates housing expenses should not consume more than 32 per cent of total household income

- BMO urges Canadians to 'stress-test' their mortgages

TORONTO, ONTARIO--(Marketwire - Feb. 24, 2011) - A survey from BMO Bank of Montreal shows the majority of homeowners are confident they will be able to sustain their mortgage payments if interest rates rise, while nearly one-in-five are unsure. The latest findings were released ahead of the introduction of new government regulations for the Canadian mortgage market.

Based on the average household income in Canada, a typical new home buyer uses just over one third of their average household disposable income to service their mortgage today, in line with historical norms.

"Total housing expenses should not consume more than one third of total household income," says Katie Archdekin, Head of Mortgage Products, BMO Bank of Montreal. "However, it is still important to be prudent and stress-test your mortgage against a higher interest rate to ensure you can afford what you signed up for."

On a cautionary note, Archdekin adds that Canadians need to examine ways to reduce overall housing costs, including considering a shorter amortization of 25 years which can significantly reduce the amount of interest paid over the life of their mortgage.

BMO Economics forecasts that the Bank of Canada will raise interest rates by one percentage point before the year-end. With housing still reasonably affordable because of low interest rates, this increase is not expected to put households under financial strain.

"Despite high prices, housing remains reasonably affordable due to record low interest rates," said Sal Guatieri, BMO Economics. "That said, Canadians should prepare for interest rates to eventually return to historic norms." 

BMO offers the following mortgage tips for Canadians:

Think carefully about fixed vs. variable:

  • While variable rate mortgages have been a winning strategy over the long term, fixed rate mortgages (currently at historic lows) provide the peace of mind of insulating you against rate increases and the certainty of knowing how much of your mortgage you will have paid down at the end of your term.

Make sure you can afford what you signed up for:

  • Stress-test your budget using a mortgage payment based on a higher rate.
  • Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of household income.

Consider a shorter amortization:

  • The shorter the life of the mortgage, the less you pay in interest.
  • Become mortgage free faster and begin saving more for retirement.
  • BMO offers a five-year fixed low rate mortgage with a maximum 25-year amortization at 3.94 per cent

Make a larger down payment:

  • If you can provide a bigger down payment, it's a significant way of helping you pay less interest over the life of your mortgage.
  • With a down payment of at least 20 per cent, you avoid paying mortgage default insurance.

For additional tips on how Canadians can manage their finances more effectively, please visit BMO SmartSteps at

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