Fixed rate increases cost today’s buyers over $ 10,000 more in interest


Fixed mortgage rates have been rising steadily since September. But by how much and at what price for new buyers?

We are about to answer it. But first, let’s take a look at what drove rates up.

Following a surge in short-term rates earlier in the year, fixed mortgage rates spent most of 2021 going sideways, just off their all-time lows reached in December 2020.

They got a second wind at the end of September, shortly after bond yields started to climb. As shown in the chart below, the yield on 5-year Government of Canada bonds, which dominates fixed mortgage rates, rose two levels during these two periods.

Bond yields began to rise in September on the first hint of hawkish sentiment from the Bank of Canada. This included signals that the Bank would end its bond buying program (quantitative easing), which had been in place throughout the pandemic to add liquidity to financial markets, and indications that rates interest rates would start to increase earlier than expected in 2022 (among other economic indicators).

Days after the yield on 5-year bonds hit multi-month highs, mortgage lenders began to raise rates.

Here’s a look at the default insured 5-year fixed rates that were available on October 1 compared to today from some of the big banks and major mortgage lenders (i.e. the rates available for mortgages). with a down payment of less than 20%):

As of October 1, 2021 As of November 11, 2021 Difference
RBC 2.19% 2.94% +75 basis points
TD 2.19% 2.64% +45 basis points
Scotiabank (eHOME) 1.99% 2.48% +49 basis points
National Bank 2.19% 2.69% +50 basis points
Gardens 2.24% 2.79% +55 basis points
National premiere 2.19% 2.69% +50 basis points
Equitable Bank 2.19% 2.54% +35 bp
Average rate increase +51 basis points

So, in concrete terms, what does a 50 basis point increase mean for buyers today?

Based on the new average mortgage amount of $ 450,000, according to CIBC, and an assumed rate of 2.19% on October 1 and 2.69% on November 11, today’s buyers would pay an additional $ 112 in monthly mortgage payments, which would translate to approximately $ 10,549 more in interest over the five-year term.

Keep in mind that savvy buyers might find even lower rates from certain brokers and brokerage houses.

Variable rate hikes to start next year

Meanwhile, variable rates on new mortgages had come down in recent months, but that trend appears to have ended, with some lenders slowly raising their variable rates in anticipation of upcoming Bank of Canada rate hikes.

Variable rates are based on a lender’s prime rate, which is based on the Bank of Canada’s target for the overnight rate, which is currently still at an all-time low of 0.25%. But the Bank of Canada has indicated that it plans to start raising rates by the “middle quarter” of 2022.

Current market forecast shows the Bank of Canada on track for seven quarter point (25bp) rate hikes by the end of 2023, with Scotiabank expecting eight rate hikes .

Rate cuts already on the horizon

But with such a rapid rate of hikes expected, the Overnight Index Swap (OIS) markets are already predicting the need to cut rates again by 2024.

“The implicit prices in the bond market show that Canadian rates peak after just two years, then decline slightly in 2024,” rate observer Rob McLister noted in a recent Globe and Mail. column. “Mortgage buyers unfortunately cannot rely on this. It’s just a projection that will undoubtedly change. But it reinforces the way bond traders think rate hikes won’t last. “

CIBC’s Benjamin Tal said higher interest rates will also begin to impact the housing market, leading to reduced demand for new and existing homes.

“Current variable rate holders may choose not to touch their principal payments and thus absorb the full impact of the higher rates, potentially at the expense of other expenses,” he wrote.

Meanwhile, recent holders of fixed rate mortgages will not see any impact from the higher rates until their renewals mature in the years to come.

“Despite the protection enjoyed by existing mortgage holders, higher rates will still be effective in slowing economic activity,” Tal added. “Going too fast, as the market now suggests, is therefore not recommended.”


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