Experts say Canadian mortgage owners should brace themselves for a potential rate hike next week from the Bank of Canada and budget accordingly.
Many mortgage owners have felt the effects of higher borrowing costs as the Bank of Canada moved to increase interest rates 10 times since March 2022, bringing the policy rate to five per cent.
The central bank’s next interest rate announcement is scheduled for Sept. 6. Bloomberg News reported that economic signals have been mixed since the Bank of Canada brought rates higher in July, but a Bloomberg survey found that a majority of economists expect the central bank to hold its policy rate next week. Gross domestic product figures released Friday showed a slowdown the in second quarter of the year, prompting more support for an upcoming rate pause.
Those expectations aside, James Laird, co-chief executive officer of Ratehub.ca and president of CanWise Mortgage Lender, said mortgage owners should prepare for a rate hike or a hold from the Bank of Canada next week.
“Borrowers should be budgeting for a rate hike so that they are prepared if it does happen,” Laird said in a written statement on Tuesday.
“The bank chose to raise at the last two announcements, so a raise is certainly still on the table.”
HOLD VERSUS HIKE
Daniel Vyner, the principal broker at DV Capital, said in an interview with BNNBloomberg.ca that as mortgage owners have largely sustained recent interest rate increases, it’s important not to “underestimate the (potential) hold” from the Bank of Canada.
“How long can someone continue to break their budget and or account for unexpected mortgage payment increases that they may have never budgeted for or believed that they would ever be needing to face this size of mortgage payments,” he said on Tuesday.
According to Vyner, a decision to keep rates at current levels could work to “crystallize the impact of the previous rounds” of interest rate increases. That means even if the central bank holds rates next week, mortgage owners will continue to feel the impact of higher interest rates, he said.
People with variable-rate mortgage products and payments that rise with prime rates would see their payments increase in the event of another rate hike, Vyner said.
“This (hypothetical rate increase) is just another blow… which naturally will be affecting their cash flow,” he said.
Individuals with fixed payments and variable rate mortgages will also be impacted by an increase in interest rates, Vyner said, adding that it would add additional interest costs to their monthly payments.
Amid higher borrowing costs, some individuals with fixed payment variable rate mortgages are seeing their amortization periods extended and are only paying interest on their mortgages.
Bloomberg News reported that as of July, 43 per cent of mortgages at the Royal Bank of Canada were amortized over 25 years, while 48 per cent of mortgages at Toronto-Dominion Bank were amortized longer than 25 years.
“The fixed payment variable rate mortgages that aren't even covering any principal have caused this whole ‘pretend and extend’ scenario of extended amortizations,” Vyner said.
Vyner said he wonders if a potential hike could “force the hand of regulators to crack down on these federally regulated lenders who have extended a vast percentage of their mortgage book.”
IMPACT ON HIGHER EARNERS
Following 10 interest rate hikes since March of last year, Vyner said the cumulative effects of higher interest rates have taken a toll on borrowers across all income levels.
“I don't think any one person that has a mortgage or is looking to buy with a mortgage is immune to interest rate hikes. It's all on a relative basis,” he said.
Borrowing power is also wavering for well-capitalized buyers, Vyner added.
“As interest rates continue to increase without incomes rising in tandem, I am starting to see that the ‘A borrowers’ of yesterday are slowly becoming the ‘B’ as of today,” he said.
HOUSING MARKET RIPPLES
According to Laird, the central bank's looming rate decision could impact the housing market in one of two ways.
“If rates go up further, it will put downward pressure on home values which have plateaued over the summer,” he said. “On the other hand, if the Bank chooses to hold, it could cause buyers to come off the sidelines, thereby increasing demand.”
However, he said an interest rate hike will prompt an increase in the stress test – which proves to financial institutions that a prospective buyer is able to afford their home – making it more difficult for buyers to qualify for their purchase.