Variable Rate Holders May Face Trouble .

CANADIANS - don't worry too much. In the USA most clients were approved at the LOWER floating rate to the maximum of their buying ability. So naturally a rate change would hurt them - if you have a VIRM in Canada you were probably approved at around 4-5% and Prime is still on 3%. Once in a while it is good not to have "The American Way".

Neil "Mortgage Man" McJannet

Monday, 31 October 2011 10:18 Newsroom . . A new report from Bank of America Merril Lynch warns about the dangers facing some Canadian mortgage holders
The report suggests that there are a vast number of variable rate mortgage holders who will be vulnerable in the event of an interest rate hike. In fact, they suggest that two of every three new mortgages is a variable rate mortgage.
In the past, according to Bank of America Merril Lynch, typically around 25%-30% of mortgages were variable rate, suggesting that the tremendous shift in appetite could spell financial disaster for a big chunk of home owners in the event of a rate hike.

The good news, at least for the moment, is that many economists have put the possibility of a rate hike off the table until around 2013- but the fundamental vulnerability remains.

While it doesn’t mean that a rate hike will spell disaster, the possibility does remain. However, as many Canadian mortgage brokers will tell you, variable rate or not- they typically qualify a client at a higher fixed rate, so as to remove them from the danger zone in the event of a rate hike, simply as a part of due diligence. While the possibility of a US- style collapse exists in theory, the prevailingly stringent attitudes towards lending in Canada suggest that there are stop gaps in place to protect against such vulnerability.

Economists at Bank of America Merril Lynch suggest that, because rates have been so low for such an extended period of time, that mortgage holders are constructing false expectations about the true cost of a mortgage, and as such are taking more risk than they perhaps should be.

They indicate that Canadian mortgage holders must be mindful of the fact that rates will likely rise. According to their research, a rise of 2% will be enough to push those on the fringe into trouble