What happens now, mortgages after BoC rate hike
The Bank of Canada’s surprise decision to raise interest rates will bring about higher mortgage costs, according to experts.
Canada’s central bank announced Wednesday a move to increase the policy rate by 25 basis points to 4.75 per cent. The move went against expectations and was only anticipated by about one in five economists in a Bloomberg Survey. However, according to Bloomberg News, policymakers indicated that further rate hikes may be warranted after electing to hold rates in January.
“Those with a variable-rate mortgage and home equity line of credit (HELOC) who are already fatigued by rate hikes, will see their interest rate increase further,” James Laird, the co-chief executive officer of Ratehub.ca and president of CanWise Mortgage Lender, said in a statement Wednesday.
“Those who have fixed payments with their variable-rate mortgage will likely exceed their trigger rate if they have not already done so. Those with variable payments will see their payments increase to absorb this rate hike.”
A trigger rate is hit when a homeowner’s mortgage payment is not sufficient to cover accumulated interest since their last payment.
Fixed rates had already started to increase ahead of the announcement from the central bank and are now likely to “increase further,” Laird said.
“Bond yields, which are the key input to fixed-rate mortgages, are at their highest point since 2007,” he said.
Leah Zlatkin, a mortgage broker and expert with LowestRates.ca, said in an interview with BNNBloomgerg.ca Wednesday, the recent policy announcement will likely drive fixed rates higher due to the “effect on the Canada five-year government bond,” she said.
According to Zlatkin, the five-year bond is often a leading indicator of what will happen to fixed rates.
Additionally, she said many people with variable rate products were “holding on to hope that by December, rates would start coming down.” Zlatkin said many individuals with a variable product are now electing to switch to a fixed product.
According to calculations from Ratehub.ca, a homeowner who put a 10 per cent down payment on $716,083 home, with a five-year variable rate mortgage of 5.55 per cent amortized over 25 years, would have a monthly payment of $4,075.
Following the Bank of Canada’s rate increase Wednesday, that same homeowner’s mortgage rate would increase to 5.8 per cent, with their monthly payment hitting $4,173.
Amid the current market conditions, Zlatkin said she recommends two or three-year fixed products to clients.
“In general, I'm proposing two and three-year fixed products for everyone, you got to ride out the storm. Unfortunately, we thought we saw some sunny skies and now it's clouding over again,” she said.
If someone is having difficulties qualifying for a shorter-term fixed mortgage, they will likely have to take on a five-year fixed mortgage “because those are the lowest rates right now which means you’ll qualify for the most money,” Zlatkin said.
Bilal Hasanjee, a senior investment strategist at Vanguard Canada, said in an interview with BNNBloomberg.ca Wednesday that the central bank’s decision to pause rate hikes in March and April spurred home buying activity, particularly in Toronto and Vancouver.
“The reasons for that were twofold, supply shortages and population growth,” he said.
Zlatkin said the recent interest rate increase will impact the housing market, potentially leading to uncertainty. She said recent supply limitations have led to increases in demand and competition among buyers.
Amid high levels of demand, many people elected to sell their homes, Zlatkin said. However, fears around interest rates may now lead to “tempered” demand levels, she said.
“And so now all of a sudden, there could be a huge supply and not enough demand. And that can really put the housing market into a rocky situation,” Zlatkin said, adding that the effect is not yet clear.
Laird said the most recent rate hike is likely to weigh on home prices.
“This rate hike will put downward pressure on home prices, which have rebounded faster than the bank had expected,” he said.
Hasanjee said that interest rate hikes from Canada’s central bank could also have unintended effects on the mortgage market.
He said that in April’s consumer price index data, around 29 per cent of core inflation was attributed to mortgage costs.
According to Statistics Canada, Canadians paid 28.5 per cent more in mortgage costs in April 2023 compared to the previous year.
“So if [the] Bank of Canada is raising rates to curb inflation, but in turn is stoking inflation by increasing the mortgage rates and in turn the housing costs, we should not forget that will also have an impact on rentals,” Hasanjee said.