07 Mar
The increasing levels of inflation have resulted in an increase in fixed mortgage rates this year. Earlier this month, the 5-year bond yield of Canadian government bonds reached a three-year high. Mortgage lenders and brokers, which include the Big 6 banks, have been increasing the fixed mortgage rates over the past few weeks. This has brought the uninsured rate closer to the 3% mark. Furthermore, Rob McLister has highlighted that the 5-year fixed mortgage rate will increase further by early March making the overall fixed rate above 3%.
It is also imperative to highlight that over the past few weeks, the 5-year insured mortgage rates have also been increasing at a rapid pace in comparison to uninsured rates. A key fact to also note is that for each 10-bps increase in rates, the monthly payment will increase by $5 for every $100,000 of mortgage debt. Moreover, according to Hogue, Canadian citizens could also be subject to four interest rate hikes this year. Each rate hike comprises of an additional 25 basis points. By 2023, it is possible that the expected interest rate would be at 1.75%. Experts have suggested that these hikes could begin as early as March, however, an economics professor at Concordia University in Montreal, revealed that the first hike could take place during the second half of the year.
Borrowers who already have fixed-rate mortgage would unlikely feel the effects of these hikes if they signed their mortgage agreements in the past six to twelve months as they extend for several years. Furthermore, in accordance with a consumer report published by Mortgage Professionals Canada, nearly 77% of mortgages have been purchased on a fixed rate in 2020.
Moreover, with persistent high inflation, it will pressure the Bank of Canada to increase their benchmark for short-term interest rate resulting in increasing costs for lenders. These costs would be further passed on to the borrowers in the form of a higher interest rate. Another key aspect to highlight is that the mortgage markets are already becoming accustomed to such hikes because of proactive measures adopted by mortgage institutions.
The rate of inflation has also risen as significantly and reached 5.1% in January. Nevertheless, Canadian citizens are still acquiring loans from different financial institutions which totaling up to $51.6 billion. A significant portion of this debt is accounted to mortgages purchased by customers. In addition, the debt-to-disposable income ratio for Canadians is now 177.2%. This means that, on average, every Canadian household now owes $1.77 of debt for every dollar of income.
Considering the increase in mortgage rates, a borrower, borrowing a $400,000 mortgage with 25-year amortization and a variable rate of 1.45 percent, would have to pay additional $47 in their monthly payment. However, with several consecutive hikes to interest rates, both fixed and variable mortgage rates, the monthly payment would increase sharply, creating potential issues for the buyers. Moreover, the Bank of Canada also signaled that the interest rates would be increasing in order to control inflation. But it is unknown how fast the rates would increase and how high they will go.
As for the remainder of the year, although the mortgage rates will fluctuate, these fluctuations would be within limits and not as high as perceived in the last few weeks. In addition, the Bank of Canada must consider the stability of the financial system. They do not aim to create instability within the system just to bring down inflation within the country.
For the buyer, surging interest rates can reduce their buying power when looking to purchase a home. Analysts have warned buyers to verify their preapproval letter from lenders. This will certify that, when rates surge, they will still be guaranteed their existing preapproval rate.
