Ottawa Mortgage Rate Increases - What comes down must go up

What will these inevitable increases do to a family's outgoings? The Globe and Mail reports that in only one year in Ontario, average home prices rose from $281,661 to $337,410 (from October 2008 to October 2009), increasing monthly principal payments on all new mortgages. And on top of that increase is expected to come more monthly repayment increases when mortgage interest rates go up in mid-2010.

In other words, mortgages that appear eminently affordable today are most likely to be unaffordable for many borrowers when bank rates rise. It is worth repeating that most people have conveniently short memories. They forget that the average mortgage rate is more like 6 percent than (for example) the 3.050 variable rate offered by TD Bank (as at November 19, 2009). It looks almost like free money. But we would be wise to recall that no one gives anything away for free - there is always a catch, right?

The catch is simply that, just as "what goes up must come down," so rates always bounce right back up again after they fall to their lowest level (as they already have). Said a senior economist at BMO Nesbitt Burns, "rates are abnormally low and in the future they're going to get higher. So be careful... if you take out a five-year mortgage today at a rate of 4.5 percent, you might expect to pay 6.5 percent at renewal."

Borrowers anticipating taking on the additional responsibility of a new mortgage would be wise to calculate their budgets with care, and existing mortgage borrowers should examine their incomes and outgoings to see if they can afford to take on the burden of an additional debt load amounting to perhaps as much as double the monthly amount they are currently paying. Moreover, the problem gets compounded when you choose an amortization period of over 25 years - the norm - and stretch your payments over 30 or even 35 years - particularly if your down-payment was small.

The temptation to borrow more money is great. But the decision rests with you as to whether you prefer to be cautious or get carried away by the exuberance of the housing market. Yes, this is a good time to buy a home, despite price increases, but one can too easily get into debt beyond what one can afford to pay off.

One mortgage brokerage company recommends that your mortgage, heating and taxes should amount to no more than 28 percent of income, and your total debt should not exceed 38 percent of income. It's a good yardstick with which to measure whether you can afford to be in the housing market at all, or whether you should continue to rent.

But even those precautions might not be enough. For example, one-third of all US foreclosures in the third quarter of 2009 had solid credit ratings. Their problems have stemmed from the unprecedented economic conditions, whereby the housing crisis continues to worsen as unemployment rates increase (now over 10.2 percent), and the so-called "jobless recovery" limps slowly along.

And, despite their safe credit ratings, one in seven US mortgages were delinquent or in foreclosure. What began as a crisis for home owners with bad credit ratings and sub-prime mortgages, has now spread to owners with safe fixed-income mortgages. They are victims of job losses in a stagnant economy unable to provide new jobs. According to Scotia Capital, millions of US home owners are threatened with losing their homes in the next two years.