BMO Bank of Montreal (USA) (NYSE:BMO) released a new report today showing that Canadian households are “stress tested” against rising interest rates. The bad news is that 43% of Canadians said that a 2% hike in interest rates would put them on the verge of not being able to afford their homes. Unfortunately, according to BMO Economics, interest rates are expected to rise at the beginning of next year. Here is what the report said of the Canadian housing market:

* “The majority of Canadian homeowners (57 per cent) say that they could still afford their home if interest rates were to climb by two per cent.

* However, one-in-five (20 per cent) indicated that a two per cent rise in rates would hamper their ability to afford their home; 23 per cent indicated they were unsure if a rise in rates would affect them.

* Almost half of women (49 per cent) would have trouble affording their home in the face of rising rates, while more than one-third (37 per cent) of men claimed the same” (Leger Marketing).

This is not a good sign for the Canadian housing market. Almost half of the country can not afford a two percent increase which could be a reality as early as next year. BMO is recommending home owners to take a 25 year amortization and stress test for mortgages with higher interest rates to see whether or not you need to adjust your spending so that you can afford your payments. The report shows the different regions that have and have not undergone a stress test for their mortgage. Interestingly, a vast majority answered either “no” or “unsure”.

Canadian home buyers need to be careful and follow the advice of their central banks and private banks to ensure that there is not a housing bubble that could drag down the economy back into a recession.

BMO gave homeowners some advice if they do not believe they will be able to make payments in a higher interest rate environment. The first was to, as stated before, get your mortgage stress tested. Next, you should consider a shorter amortization because the less time you have on your mortgage, the less you pay. Then, you may want to consider a larger down payment. The larger your down payment is, the less interest you pay throughout the mortgage. Lastly, and most importantly, always have a rainy day fund that you can pull from if life throws you surprises.