Our friends made a strategic decision almost three months ago: They went to a five-year fixed-rate mortgage from the floating rate they had been enjoying, one that carried an interest rate of just 1.25%, but had risen to 1.75%. They are now locked in at 3.74%, which is well below the bank posted rate of 6.25% and below the 4.25% floating rate they started out with two years ago when they bought.

They are comfortable with their decision and debt level, as are four of five Canadians who were recently surveyed about their debt-comfort levels. But one out of five is not, and with mortgage rates on the rise and perhaps headed toward 8% in a couple of years, the unease will surely grow.

As someone who never enjoyed a mortgage rate less than 8.5% and who once briefly shouldered a second mortgage of 21.5%, I find it a little difficult to empathize with those who are seeing the borrowing rates on their homes head north from the once-in-a-lifetime levels of the past few years. Of course, most people are still able to negotiate mortgage rates below those officially posted by the banks. So, many borrowers are still paying about half of what we paid for buying a series of houses over a quarter-century span.

It's also difficult to sympathize with those who have not given themselves any wriggle room, any margin of safety, by buying homes that are near the breaking point of what they can afford. When rates go up, as they surely had to, some of these folks who are already "house-poor" are in danger of becoming "house-less."

Further, when I am one of many savers who have been effectively subsidizing low, low mortgage rates with conservative fixed-income investments paying the square root of squat, the empathy flows ever more slowly.

And yet, as the banks and other lenders slowly ratchet up rates, I am concerned that these higher rates will hurt friends and relatives who still have mortgages. A one-percentage-point rise may not sound like much, but it boosts the interest costs of a 4% rate by 25%. A two-percentage-point rise to 6% adds 50%.

A two-percentage-point rise for those homeowners who have enjoyed almost-free money with floating-rate mortgages is pretty much a lock, given the emerging interest rate landscape of the next year or two.

Rising mortgage rates are the biggest threat to house prices.

While Canadian home prices are high by some measures, such as average prices to average annual incomes, and many big run-ups in prices in the past have ended badly, the general expectation is that there will be an orderly cooling of the market, aided by that gradual rise in mortgage rates.

With official inflation numbers still relatively tame and the economy not yet robust, Mark Carney and the BoC need not raise rates to such a level that might endanger the recovery. Rates higher than generally anticipated would further boost our dollar, which in turn would threaten the economy.

"I would say that persistent strength in the Canadian dollar is a risk," Carney told the House of Commons finance committee this week. Consequently, the BoC must walk a fine line in helping to cool the housing market and keeping the loonie from getting even hotter. The success of this balancing act is vitally important to the country and to individuals.

Source National Post