This week will bring another rate announcement from the Bank of Canada – and borrowers are eagerly awaiting how painful rates are.
Two disappointing inflation readings earlier this month – a mere drop of -0.1% to Canada’s CPI at 6.9%and from -0.06% in the United States to 8.2% – show that while the tightening of monetary policy has put an end to uncontrollable growth, the measure remains far too high for the comfort of policymakers.
This set the stage for a 50 basis point (bps) minimum rise to come this week, which will be followed by another 75 bps whopper to end the year in December. That will take Canada’s benchmark cost of borrowing to 3.75% this month and 4.5% by the end of the year, which will likely be its end point.
In a research noteRobert Kavcic, BMO’s chief economist and chief economics officer, says the lender’s call is actually for a bigger 0.75% rise this week, due to soaring consumer prices.
“Underlying inflation remained stubbornly strong in September, with non-food and energy price growth in the 5% annualized range on most terms between one and 12 months. This is not going to go down well in Ottawa,” he wrote.
“At the same time, the Bank can only fall so far behind growing Fed tightening expectations without putting even more downward pressure on the loonie, which is becoming even more inflationary. So even if housing cracks more significantly and core inflation retreats sooner than in the US, the Bank might not have the luxury of releasing the tightening brakes when it would otherwise.
Jerome Trail, Mortgage Broker at The mortgage tracksays STOREYS that while the Bank of Canada has made positive progress, it has only a limited number of levers at its disposal when it comes to the economy.
“In my view, the Bank of Canada recognizes that it can only impact so many things. And there are a few major factors beyond their control; at the same time, we should take a step back and recognize that they have in fact managed to rein it in or stop it — they haven’t been able to reduce it, but they have stopped it from rapidly increasing. We basically stabilized,” he says.
The impact on the housing market
According to Leah Zlatkin, a LowestRates.ca Chartered Mortgage Broker and Expert Says Another Rate Hike Will Further Slow Down the Nation’s Housing Market as Higher Rates Continue to Reduce Affordability for Buyers; The average Canadian home price fell almost 7% a year in September, the latest in a monthly downward trend that began with the Bank of Canada’s first hike in March.
“We’ve seen the market slow down across the country, but home prices are still not affordable for the average Canadian buyer who may still struggle to qualify for a mortgage,” she says. “While the hikes are necessary to keep inflation under control, it will undoubtedly make financing more difficult for the average buyer or homeowner.”
According to his analysis, a 50 basis point hike will raise lenders’ prime rates to 5.95%, bringing variable mortgage rate pricing to around 5.2% and higher for a five-year term.
For today’s variable borrower who holds a rate of 4.45% on a $700,000 home, this will lead to a $172 increase in their monthly mortgage payments to $3,540, compared to to the $3,368 he is paying today.
Those with home equity lines of credit (HELOCs) — which are also premium-based products — would see their monthly payment increase by $36 to $637, based on a balance of $100,000 and a rate of 6.45%.
In addition to higher monthly payments, this week’s rate hike could also move more variable borrowers into their trigger zone – the point when their monthly payments no longer cover their mortgage interest, necessitating a change in timing. mortgage amortization, or for the borrower to make a larger lump sum payment, says James Laird, co-CEO of Ratehub.ca and president of mortgage lender CanWise.
“Anyone who has held an adjustable rate mortgage since the rate increases began will be tired of the oversized endless rate hikes,” he says.
“Anyone with a variable rate mortgage or a balance on a home equity line of credit (HELOC) will be looking at the Bank’s language to see if there are any signs that rate hikes are coming to an end. If the Bank of Canada continues to signal further rate hikes, Canadians with variable rate mortgages will consider sticking with fixed rates… Assuming the Bank of Canada raises another 50 basis points , most lenders’ variable rates will be the same or higher than their respective five-year fixed rates, which is rare.
Fixed rates also on the rise
While the volatility of today’s variable space may tempt new borrowers to opt for a fixed rate instead, there isn’t much relief to be found there either; the surge in bond yields – currently the highest since 2008 at 3.73% — propelled fixed-rate products to new heights.
According to the price comparator PRICEDOCCAseveral lenders responded last week with price increases for their fixed five-year deals.
“Last Friday, THINK Financial raised its five-year fixed mortgage rate to 5.14% and MCAP pushed it to 5.44%. These interest rate increases follow Scotiabank’s announcement on October 12 of a 25 basis point increase for fixed rate mortgages and a narrowing of the spread over prime. for variable rate mortgages which is equivalent to an increase of 10 basis points. TD announced the same day a 20 basis point increase in fixed rate mortgages,” their statement read.
“Lenders are reacting to soaring bond yields and could price in an expected 75 basis point rise ahead of Wednesday,” said RATESDOTCA mortgage and real estate expert Victor Tran. “If consumers are considering moving to a fixed rate, it might be time to lock it in.”
Penelope Graham is the editor of STOREYS. She has over a decade of experience in real estate, mortgages and personal finance. His commentary on the housing market is featured frequently in national and local media, including BNN Bloomberg, CBC, The Toronto Star, National Post and The Globe and Mail.