Despite the recession, home prices have been resilient in many Canadian centres, with major hubs like Toronto and Vancouver seeing sustained increases in valuations.

Already 71% of current and future homeowners think house prices are too high, according to a survey commissioned by BMO, but prices continue to climb as buyers rush into a purchase, worried that they will soon be priced out of the market completely.

About 15% of respondents reported having been in bidding wars. Among those who lost out, 14% said the experience had driven them to overpay on their next offer.

“There’s definitely a sense of urgency among home buyers,” said Lynne Kilpatrick, senior vice-president, personal banking, BMO Bank of Montreal. “We believe getting the right house and mortgage starts with the right advice. In short, you need to know when to walk away.”

She says buyers need to view their home purchase within the context of their overall financial plan, and ensure they can not only pay for it today, but also when mortgage rates inevitably rise and drive up their payments.

Buyers need to remember unexpected repairs may be needed, and budget accordingly. Taking on the largest mortgage they can carry will likely leave little room in the budget for such repairs.

Kilpatrick recommends buyers “stress test” their household budget to see if they can handle a higher interest rate down the road. As a rule of thumb, total housing costs should not consume more than a third of household income.

Historically, variable rate mortgages have proven to be the best choice, costing less over the long term than fixed rate mortgages. But going the fixed rate route provides stability of the payment. Besides, with interest rates at record lows, there is a strong chance that the fixed rate option will cost less, as the variable rate can pretty much only rise.

The majority of Canadians (64%) believe that mortgage rates will rise over the coming year, according to RBC’s 17th Annual Homeownership Survey.

This should come as no surprise, given that the Bank of Canada’s trend-setting overnight rate target has been at a record low 0.25% for nearly a year. In fact, the only surprise is that the majority isn’t larger.

The survey also found that among those who hold a mortgage, 66% said the prospect of higher rates was cause for concern. Financial advisors should start boning up on this side of the balance sheet, as clients may seek assistance.

“The best advice for concerned homeowners is to review their mortgage holdings with a financial advisor regularly, just as they would an investment portfolio, to position themselves for any upcoming changes,” said Marcia Moffat, RBC’s head of home equity financing.

It appears that Canadians are working on whittling down their mortgage debt in advance of rate hikes, with about 60% saying they were paying more toward their principal. The most popular strategy has been to make a lump sum payment — 18% said they had done so, while 16% said they had doubled up their payment.

While 49% of respondents said they had expected their mortgage to be smaller than it is, Moffat points out that mortgage-holders should focus on higher interest debt — such as credit card balances — first. Second on the list should be lower interest lines of credit, with the mortgage — typically the lowest rate debt — coming last on the list.

(03/24/10)