Expected interest rate rise a concern for homeowners

The Bank of Canada is expected to raise interest rates as soon as this summer, something that could have a big impact on personal finances and real estate.

Economists say the cost of borrowing will start to rise by July, and it could put Canadians with mortgages in a very tight situation.

A recent poll by the Bank of Montreal found two thirds of Canadians say they can handle higher mortgage rates, but 20 per cent say they don't know if they will be able to make their payments if rates increase.

Cambridge resident Carrie Ann Indoe is among those who are concerned, "Especially with the economy and people losing their jobs, my husband's job right now is uncertain from day to day so it would definitely be a concern."

Many Canadians are already stretched to the limit.

A study by The Vanier Institute of the Family found for every $1,000 in after tax income, on average Canadians owe $1,500. Household debt, including mortgages and credit cards is $100,000.

Katherine Scott of The Vanier Institute says "There's certainly concern right now that the debt loads we're carrying are too high and if interest starts tracking, going higher as they predictably will do, that a lot of families will be in a pretty precarious situation."

For example, for a $200,000 mortgage on a five year fixed rate and a 25 year term:

Source: ING Direct Mortgages

Finance Minister Jim Flaherty has already tightened up mortgage qualification rules and shortened the maximum mortgage length from 35 years to 30 years in an effort to curb debt.

Doug Hoyes of Hoyes, Michalos Bankruptcy Trustees says "If it's harder to qualify for a mortgage and if the interest rates start to go up, that means people who in the past could have bought a house won't be able to in the future. That takes a little pressure off the demand, that's going to eventually lead to somewhat lower prices."

While that that may help new homebuyers, Hoyes says those struggling with mortgage payments could be in for a shock if they sell.

"They bought a house when times were better, now the house has gone down in value and so when it comes time to renew, there isn't the equity there that they'd hoped," he says, "but they can't sell the house because if they do they're going to lose money and that puts a real financial strain on it."

The Vanier study also found the number of people who've fallen three months or more behind on their mortgage has doubled since the recession began.

Coming up in part two: The impact rising mortgage rates may have on local real estate prices and a simple tip that could help people save over $1,000 each year.