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Just how big a mortgage can people carry?

This is a scary reality that may hit Ontario - hard. It won't take much to double an interest payment - maybe even triple and quadruple -- and still only be at 10 percent. I know driving into London - I see many homes that I can't figure out how everyday families afford. Pretty soon they may realize they can't afford them and this economy is back in the tank.

http://www.theglobeandmail.com/blogs/jeff-rubins-smaller-world/just...

Jeff Rubin

When money is free, it’s hard not to borrow it, even if the lender keeps warning you to be vigilant against debt. That’s exactly what Bank of Canada Governor Mark Carney has been telling Canadians while at the same time keeping their cost of borrowing as low as it’s ever been.

The obvious question, of course, is, if caution is warranted in borrowing, why is the cost of money so cheap? Since no one wants to pay more for their loans, particularly mortgage-holders, it’s a question no one bothers to ask Governor Carney.

But ask you should. Because the Bank of Canada’s free-money policy may lead you to places you’d rather not go.

A financial bubble is built on an unsustainable premise. Tomorrow’s bubble in the Canadian housing market is constructed on the premise that today’s record low mortgage rates will remain in place. And that, in turn, is based on the idea that inflation will continue to dissipate in the face of a slack economy.

Neither premise should be in your financial plan.

Today’s inflation rate is no more sustainable than today’s interest rates. Both are rear-view mirrors on where the economy has been, not where it is going.

Energy prices, which were falling a year ago, are now back on the rise. Just as the inflationary impact of those prices triggered the fatal rise in interest rates which, in turn, gave us the deepest postwar global recession ever, energy prices will once again push inflation and interest rates much higher. (See my post Financial Crisis or Energy Shock? for more on this.)

And this time the inflationary fallout won’t just be in the energy component of the Consumer Price Index. The impact will be much broader, as soaring transport prices encourage higher-cost local production to replace sourcing from cheap labor markets halfway around the world.

Stress test your floating-rate mortgage three or four percentage points from today’s level and take a good, long look at the resulting increase in your monthly mortgage payment. For some homeowners, that could be as much as another $1000 per month.

Twenty years ago a similar shock to borrowing rates caused Canadian housing prices to fall by an unprecedented 25 per cent. I know because I called it.

That call was as much about where interest rates were going as it was about where housing prices were heading. Based on current borrowing rates, today’s homeowners will be facing almost as large an increase as they did back then.

So heed Governor Carney’s caution when you decide how big a mortgage you can really afford to carry.

Because once the Bank of Canada starts raising your mortgage rate, it will be a very long time before they stop.

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Replies to This Discussion

Permalink Reply by Dale Ketcheson on December 25, 2009 at 2:04pm
On a slight tangent, what lenders seem to be the most receptive to consolidating/refinancing farm loans at these lower interest rates? Anybody had any particularly pleasant experiences?
Permalink Reply by John Schwartzentruber on December 28, 2009 at 6:31am
Dale, I've found both FCC and BMO to be first rate for our needs. Very flexible and accommodating.

On the topic of interest rates, 20%+ didn't last that long, but long enough to kill a lot of us. And we thought it was bad.

Well, 3% - 5% interest rates will end up killing off more people than 20% did because as nice as it seems to have low interest, it will get a lot of people way too far into debt. And when the rates inevitably go back up to more normal levels . . .

Low interest rates are likely the only thing that have staved off bankruptcy for a lot of beef and pork producers.
Permalink Reply by Wayne Black on December 28, 2009 at 2:09pm
Dale, I found that FCC was very accomodating (once I got talking with the right person. It took a bit of persuading to get the person to look into my account to see what the fees would be andwhat the resulting rates would be.
At the end of the day we re-financed most of our fixed rate loans and we are saving money even after paying the fees.
This occured in February of this year.

Dale Ketcheson said:
On a slight tangent, what lenders seem to be the most receptive to consolidating/refinancing farm loans at these lower interest rates? Anybody had any particularly pleasant experiences?
Permalink Reply by Dale Ketcheson on December 28, 2009 at 3:12pm
Thanks guys.
Permalink Reply by rein minnema on December 30, 2009 at 7:02am
It is time to start looking at longterm fixed rates, you do pay a premium but there is more room for the rates to go up than down.
See it as a insurance policy/ protection for stability

Wayne Black said:
Dale, I found that FCC was very accomodating (once I got talking with the right person. It took a bit of persuading to get the person to look into my account to see what the fees would be andwhat the resulting rates would be.
At the end of the day we re-financed most of our fixed rate loans and we are saving money even after paying the fees.
This occured in February of this year.

Dale Ketcheson said:
On a slight tangent, what lenders seem to be the most receptive to consolidating/refinancing farm loans at these lower interest rates? Anybody had any particularly pleasant experiences?
Permalink Reply by Rob Gamble on January 5, 2010 at 3:17am
If you are looking for a loan calculator you can find one on the OMAFRA web site at http://www.omafra.gov.on.ca/english/busdev/download/calc_omafloan.htm. It can calculate a whole range of options. I have also attached it to this post.
Attachments:
Permalink Reply by Steve Twynstra on January 5, 2010 at 5:27am
Thanks Rob....and here I have been making up my own worksheets in Excel all these years....with less detail.

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