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Before this gets jammed, I would post a link to a site on how Canadian mortgages work for our American readers. Canadian and American mortgages are not the same financial product at all, the details differ (sometimes greatly). Just so we are all on the same page.

three points:

1. debt/income is a critical measure besides the payment "shock." Many canadians accelerate their mortgage and pay a bit more than required. A 20% increase in mortgage payments is probably not a big deal if one is paying 10% of income to the mortgage (then one goes from paying 10% of income to 12% of income). Conversely, if its 30% then one goes from 30% to 36%, a much bigger shock.

2. lending standards: good LTV. good LTV. good LTV. cant say it enough: initial mortgages should have plenty of cushion! to slow a "bubble," ltv is the key.

3. interest rate rises are endogenous, in the sense that the monetary authority will not arbitrarily raise rates to 8%. They will raise rates just enough to choke off inflation (hopefully not to prick a "bubble," see #2). How high they raise rates is a function of how sensitive the economy is to higher rates. If lots of people are highly sensitive to a rate climb, they will not hike them as far.

Cool graph. I can hardly think of a better way to show how changes in interest rates alter finances for homeowners. I wonder if you surveyed homeowners, how many you’d find were resilient to what level of change in interest rates. Do they expect interest rates to even maybe go up by more than a couple/few percent in the next five years?

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