Jul 4, 2023
July rate hike could trigger problems for mortgage owners: expert
, BNN Bloomberg
Further rate hikes could lead to a tipping point for the Canadian economy: Kambiz Kazemi
VIDEO SIGN OUT
Canadian households are being closely watched by the country’s central bank as interest rate hikes pose a serious danger to over leveraged mortgage holders, one expert cautioned.
The Bank of Canada's surprise rate hike in June will put additional pressure on Canadian households that are already struggling with their debt, and market participants have priced in a 50/50 chance of yet another hike next week, Kambiz Kazemi, chief investment officer at Validus Risk Management, told BNN Bloomberg in a TV interview on Tuesday. He warned a rate hike in July could push Canadian households into trouble.
“The risk we have highlighted a number of times is regarding the leverage of the households,” Kazemi said.
Kazemi explained that in this heightened interest rate environment, the Canadian banks have taken on three strategies to ensure mortgage payments are made. Mortgage holders are either being asked to pay more money on a monthly basis, extended their amortization from an average of 25 years to as high as 40 years, or lastly, participate in a negative amortization, which is when the monthly interest that cannot be paid is added back to the principle of the home price.
“None of these things are very good in the long run,” he said.
The BoC is also keeping an eye on these trends, which were detailed in a report, Kazemi added. The concern comes when the trigger rate, which is the point when a homeowner’s mortgage payment doesn’t cover their monthly interest, rises to dangerously high levels, he said.
“If we raise another, in our view, 50 basis points, we’ll be at 80 per cent of triggers on the variable mortgages — so that’s a very high number,” Kazemi said.
The risk of a hike in July remains a 'coin toss', he added, as inflation in May fell to 3.4 per cent, the latest data from Statistics Canada showed.
Another key data point to keep in mind is unemployment, Kazemi noted.
Canada's economy shed 17,300 jobs in May, which economists regarded as minor losses, while the unemployment rate rose to 5.2 per cent, marking the first increase since August 2022, according to Statistics Canada.
“If the unemployment market starts showing more weakness then essentially, yes, you can have more of a downside and surprise everybody on the abruptness of it,” he said.
The Bank of Canada's surprise rate hike in June will put additional pressure on Canadian households that are already struggling with their debt, and market participants have priced in a 50/50 chance of yet another hike next week, Kambiz Kazemi, chief investment officer at Validus Risk Management, told BNN Bloomberg in a TV interview on Tuesday. He warned a rate hike in July could push Canadian households into trouble.
“The risk we have highlighted a number of times is regarding the leverage of the households,” Kazemi said.
Kazemi explained that in this heightened interest rate environment, the Canadian banks have taken on three strategies to ensure mortgage payments are made. Mortgage holders are either being asked to pay more money on a monthly basis, extended their amortization from an average of 25 years to as high as 40 years, or lastly, participate in a negative amortization, which is when the monthly interest that cannot be paid is added back to the principle of the home price.
“None of these things are very good in the long run,” he said.
The BoC is also keeping an eye on these trends, which were detailed in a report, Kazemi added. The concern comes when the trigger rate, which is the point when a homeowner’s mortgage payment doesn’t cover their monthly interest, rises to dangerously high levels, he said.
“If we raise another, in our view, 50 basis points, we’ll be at 80 per cent of triggers on the variable mortgages — so that’s a very high number,” Kazemi said.
The risk of a hike in July remains a 'coin toss', he added, as inflation in May fell to 3.4 per cent, the latest data from Statistics Canada showed.
Another key data point to keep in mind is unemployment, Kazemi noted.
Canada's economy shed 17,300 jobs in May, which economists regarded as minor losses, while the unemployment rate rose to 5.2 per cent, marking the first increase since August 2022, according to Statistics Canada.
“If the unemployment market starts showing more weakness then essentially, yes, you can have more of a downside and surprise everybody on the abruptness of it,” he said.
