2% rise in interest rates could break homeowners

It hasn’t been this easy to pay the interest on your mortgage in almost 25 years, but a report by a credit rating agency. says there are clouds on the horizon of this feel good news story, reports The Financial Post.

According to DBRS Inc., Canadians only need on average 3.7% of their household disposable income to cover the interest on those loans — the lowest percentage on the books.

The ratings agency lays out what it calls an “interest rate shock” scenario where rates rise two percentage points — an increase that would be hefty enough to leave the average Canadian with more debt than the Office of the Superintendent of Financial Institutions considers acceptable.

That increase in rates would mean the average Canadian household with a conventional mortgage, not insured by the government, would see almost 46% of pre-tax income going towards paying down debt — a level on par with what we saw in the early 1990s when interest rates were double digits. So a two percentage point increase would mean our debt servicing costs jump by six percentage points.

The impact wouldn’t be immediate for existing Canadian homeowners because once you have a mortgage that test only comes into play if you decide to switch lenders.

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