In the last couple of years housing prices in certain areas of Canada such as Toronto and surrounding areas have risen substantially. Demand is outweighing supply and therefore driving prices higher. With mortgage rates being so low over the last few years, housing is a little more affordable but the risk is substantial when rates do go up. As an example lets look at Mike and Ike, a couple of friends just graduating university and starting their careers. They will have some student loans to pay off but are really keen and want to get into the housing market so they dont miss out on the potential increase of owning a house. They have never owned a home before but think this would be a good time to start and plan to co-own the new place. In order to save for a down payment they will have to really work hard at budgeting and will need to likely have CMHC as they will not likely have enough to avoid the fee (discussed later in the chapter). Lets assume they manage a 10 percent down payment with a $400,000 home and amortize a variable-rate 2.69 percent mortgage over 25 years. Therefore $400,000 $40,000 + $8,640 (for CMHC fees) = $368,640 as a principal owing. This is equal to a monthly mortgage payment of $1,686.47. They think this is about the same as what they are paying in rent so this seems like a great idea. However, Mike and Ike need to answer some questions before entering a housing arrangement.

QUESTION

What is one risk they need to consider with their financing decision and how should they prepare for possible changes in interest rates?