What do rising rates mean for Canadian homeownership?

With inflation, rising interest rates, and housing prices all weighing heavily on Canadians, the dream of homeownership may be slipping even further away. In fact, some who have already achieved it may have to give it up.

In the latest edition of Manulife Bank’s bi-annual debt survey, nearly one in four homeowners said that if interest rates were to rise further, they would be forced to sell their home. As many as 18% of homeowners, the survey added, believe they can no longer afford their house.

“The feeling that you might need to sell your home definitely opens up concerns,” says Lysa Fitzgerald, Vice President, Sales, at Manulife Bank. “Do I need to sell it right now, or can I wait a little? If I sell it now, do I have to take a loss? After I sell it, do I have to rent?”

With rates well and truly on the rise, more than one in five Canadians are anticipating a substantial negative impact on their overall mortgage, debt, and financial situation.

Affordability is also a major concern for Canadians, as two thirds of non-homeowners surveyed didn’t think homes in their local community were affordable. Even outside the housing markets, price and cost pressures are pushing nearly half of Canadians to reconsider summer vacation plans, or are stretched so tight that they’d struggle to handle unexpected expenses.

“That tells me many Canadians aren’t necessarily aware when they’re overspending, and perhaps haven’t looked closely at all aspects of income coming in, and cash going out,” Fitzgerald says.

Adding to the magnitude of the economic forces at play is the fact that so many Canadians have been ill-equipped to face them. Among the survey participants, less than half said they feel ready for the ramifications of rising interest rates (46%), inflation (42%), or housing prices (40%).

According to Fitzgerald, nearly a third of respondents admitted they don’t understand how inflation or interest rates work. Nearly three in four do not have a written financial plan, and almost half don’t have a household budget.

“We’ve been living in a pandemic, and interest rates have been pretty low during that time, so that has absolutely influenced how Canadians have been buying and spending their money. No one planned for that,” she says. “And it’s really hard to plan for potential rate hikes. So many Canadians who don’t necessarily understand how interest rates and inflation can affect their cash flow have found themselves in a very different position.”

If the climate of economic extremes continues any further, something has to give. A four-fifths majority of respondents in the survey think Canada is undergoing an affordability crisis, suggesting budgets will be taken even closer to the brink – or over the edge – if inflation continues unabated.

With all the macroeconomic risks weighing on Canadian households, Fitzgerald encourages Canadians to speak with a certified financial advisor who can help them find out where their money is being spent, create a comprehensive budget, and regularly review it as needed. Having an advisor in their corner could also help struggling Canadians realize many others are in the same spot, as well as provide some financial flexibility by presenting different solutions.

“I think a lot of Canadians are finding themselves in a situation where they took out the highest mortgage they could qualify for, and maybe got it at variable rates that are going to float with prime rates,” Fitzgerald says. “So when folks are going out and getting their mortgage, it’s also good to have a conversation with an advisor around what they can qualify for, versus what they can actually afford.”

To tighten their belts, Fitzgerald suggests that Canadians can review their day-to-day costs for opportunities to trim down their spending, like potentially being ruthless about their cell phone usage, being more intentional about meal planning, or not doing takeout as often.

“Another major opportunity could come from finding ways to pay less interest on their debt, which may come from consolidating it into a home equity loan or into just one type of account,” she says. It also helps to have clear goals to accelerate and prioritize their savings, which can help people become more focused about how they use their monthly income.”