Rising Interest Rates and Mortgages: What Are They Helping and Hindering It?

Rising Interest Rates and Mortgages: What Are They Helping and Hindering It?

With the Bank of Canada raising its policy rate until 2023, experts expect the gap between fixed and variable mortgage rates to narrow. If you’re in the market for a mortgage, here are some tips on what to consider when deciding which type to choose.

Variable rate mortgages have an interest rate that can fluctuate in relation to the Bank of Canada overnight rate. Fixed rate mortgages, which are priced based on bond yields, see borrowers paying the same rate of interest for the life of the loan.

“The gap is really different [based on] “Just a year and a half or two years ago, both the variable and the constant for five years,” Robert Hogg, chief economist at Royal Bank of Canada, told CTVNews.ca in a phone interview on Tuesday. [rates] It was roughly the same, then the gap widened dramatically and now it’s shrinking again.”

Mark Ostland, director of mobile experience at Meridian Credit Union, says people with variable rate mortgages will see their monthly interest payments go up once the Bank of Canada starts raising rates. As of May 31, Meridian Credit Union’s five-year variable mortgage rate is 2.6 percent. Ostland said a 0.5 percent increase on a $600,000 mortgage would see monthly interest payments increase by about $170.

Canada’s central bank raised its overnight interest rate by 0.5 per cent in mid-April, aiming to cool inflation by the largest single increase in more than 20 years. According to Statistics Canada, the country’s inflation rate reached 6.8 percent last month, its highest level in more than 30 years. The Bank of Canada said its goal is to keep inflation between one and three percent.

With the gap between fixed and variable mortgage rates closing, experts are hesitant to recommend one over the other.

Variable mortgage rates are lower than fixed mortgage rates at the moment. As of May 31, interest rates on five-year variable mortgages among major Canadian banks were generally between 2.5 and 3 percent, while five-year guaranteed fixed rate mortgages came in with interest rates of 4.5 to 5 percent.

Ostland said that variable rate mortgages have historically provided homeowners with cheaper mortgage costs over the years, mainly because they are inherently riskier for consumers.

Data show that rates are variable in the long run [produce] The lowest rate overall over a long period of time, he said. “[You’re] We’ll have some hills and some valleys. Now, we’re in the hill… But for the past 30 years, we can definitely see valleys as well.”

However, Ian Lee, associate professor at Carleton University’s Sprout School of Business, expects the Bank of Canada to continue raising the policy rate to more than three percent by the end of 2023. As a result, he said, it could be beneficial to consider a fixed rate mortgage. , as holders are immune from any price hikes until their mortgages are renewed.

“If anyone thinks that prices are going up, that’s the key to reform,” Lee told CTVNews.ca Tuesday in a phone interview. “Because then you get locked up [and] It won’t go up on you despite the general price hike.”

In the end, Hogue, Lee, and Ostland all say that the decision to choose one type of mortgage over another is down to individual risk appetite. Those who prefer a greater sense of comfort knowing the amount of mortgage principal and interest payments each month are advised to go to

Lee said that fixed-rate mortgages can provide certainty about monthly payments, and while people are open to taking on more risk and increasing interest payments over time, variable-rate mortgages remain a solid option.

“If you like to gamble and speculate,” he told me, “remain variable.” “If you are more financially conservative [and] You don’t want to be exposed to any surprises, then lock yourself up.”

Impact on the Canadian housing market

With several rate increases expected from the Bank of Canada going forward, Hogg said he acknowledges that some borrowers may be concerned about whether they will be able to meet their debt obligations. Ostland said this could be particularly challenging in the current high inflation environment, with the cost of groceries, gas and other items rising.

“This is not good for the individual mortgage holder by any means – all this is to increase the interest portion of [mortgage] “This is a huge flaw,” Ostland said.

However, Hogg does not expect to see most Canadians default on their mortgage payments as interest rates rise, he said. Part of the reason for this is the stress test that Canadian homebuyers must pass before getting a mortgage. In order to qualify for a mortgage, borrowers must demonstrate that they can afford interest payments of up to 2 percent above the mortgage contract rate, or 5.25 percent, whichever is higher.

“This is where stress testing becomes really useful because borrowers… have been tested for this kind of situation, and it’s very surprising [and] Rapid rise in rates,” he said. “So the vast majority of mortgage holders should be able to afford higher rates.”

Higher interest rates are also expected to further cool the Canadian housing market. Activity within the market showed signs of slowing in April, with fewer homes sold than in the previous month. The median home price in Canada also fell from $796,068 in March to $746,146 in April, according to the Canadian Real Estate Association. These prices are not adjusted seasonally and are a total for all types of residential properties.

With interest rates rising, Hogg said, expectations are that home prices will fall across Canada in the coming months.

“We believe it will reduce the demand for housing after it was very hot in the summer of 2020,” he said. This, in turn, will help rebalance the markets and lead to some price drops.

Falling home prices have already led to instances of buyer remorse within the market, with some homebuyers expressing concern that they may have overpaid for a newly purchased property that is now declining in value. Ultimately, Ostland said, this will result in home prices that are more reflective of the actual value of the property.

“Suppose you go to the store and there is one item on the shelf and 10 of you want it, you indulge in the frenzy of over-bidding,” he said. “Cooling now reflects the true value of the home, not an inflated value based on external economic factors.”

After all, he told me, the fall in home prices is a good thing.

“Young people and immigrants have been gradually excluded from the market in Canada due to this extraordinary and unprecedented increase and I believe the unjustified increase [in home prices] “In the last two or three years,” he told me. If we want to make housing accessible to everyone [these groups]then we need to accept that the market needs to relax and reverse some of the massive increase that has occurred.

“I don’t see any other solution… for higher housing prices.”

Consider the terms of the offer and transfer of mortgages

In order to prepare for future increases, Hogue advises Canadians to stay abreast of market activity and speak to mortgage professionals for guidance. He also recommends spending caution and reducing discretionary expenses if necessary to keep up with the monthly payments.

“Be very aware, from a budgetary perspective, that you may encounter higher interest rates in the future,” Hogg said.

Ostland also recommends that Canadians consider adding conditions to their offerings, such as a home inspection. With homes likely to receive lower bids compared to previous months, he said, sellers will likely be more accepting of terms when deciding which offer to accept. It’s also worth considering the possibility of swapping existing variable mortgages with fixed mortgages, Ostland said.

“[With] Lots of variable lenders, you can convert your variable to a fixed variable at any time.” “The rates are higher, but it may give you the fixed payment you are looking for, and ultimately peace of mind.”

Hogg said he expects another 50 basis point increase in interest rates in July, followed by two additional 25 basis point increases before the end of 2022. At this point, he said, the bank is likely to pause in raising rates in order to assess and determine the impact of these Inflation increases in Canada before deciding how to proceed.

With files from Reuters and the Canadian press.

2022-06-01 13:57:00

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