Welcome to Mortgage Rundown, a brief overview of the real estate finance landscape in Canada from a mortgage strategist Robert McLister.
Next Wednesday will likely bring the biggest test for variable rate borrowers in years.
On March 2, the Bank of Canada is expected to raise its key rate to limit the most serious inflationary threat Canada has seen in decades.
The market expects next week’s hike to be the first of around a two percentage point rate hike through 2023.
That’s enough to worry variable mortgagors. And no less than 54% of borrowers chose record variable rates, according to the latest monthly data from Statistics Canada.
Variables have historically cost less than fixed mortgages over most five-year terms. But variable rate borrowers weren’t so lucky in the previous rate hike cycle. If you had gotten the best variable rate available five years ago – just before the Bank of Canada started raising rates – you would have easily paid more interest than if you had chosen the lowest fixed rate at the time. ‘time – assuming you didn’t break the mortgage early and pay a penalty.
The same could be true this time around if market rate expectations materialize. In fact, if Canada sees a rate hike of 200 basis points – while the bond market is pricing in – the Bank of Canada should start reversing those hikes within three and a half years so that new rate borrowers variable pay less than those in a five-year fixed rate. (There are 100 basis points in a percentage point.)
Can homeowners afford 200 basis points in rate hikes?
The answer is usually yes. Most mortgagors have sufficient home equity or financial resources and the vast majority of them are stress tested, i.e. they have to prove they can afford a rate increase of at least 200 basis points.
But not everyone is so comfortable. More … than One out of five are highly indebted, according to data from the Bank of Canada. And while the government stress test lets you prove you can afford your mortgage payment, property taxes, heat, condo fees, and major credit payments, here’s what it doesn’t take into account: groceries, babysitting, travel/gas, utilities, home maintenance. /repairs, internet, cell phones, television (streaming/cable), vacation, dining/entertainment, education, home, auto and life insurance, etc.
In other words, the mortgage stress test does not assess your “real” budget.
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Prior to these 31-year highs in inflation, most Canadians were already live beyond its means – more than half being just $200 from not covering their monthly expenses.
A rate increase of more than 150 basis points would not help. This would increase payments by more than $400 per month for someone who mortgages an average Canadian home with a 20% down payment and 25-year amortization.
This would challenge up to 61% of those renewing their mortgage next year. This is the number of people who fear having “financial problems”, according to a recent MNP Pollif interest rates “rise much higher”.
Fortunately, most variable rate borrowers have fixed payments. They will experience no payment shock until they renew or refinance.
The good news is that none of this involves massive mortgage defaults. That is, as long as the economists are right and home values don’t crash.
Instead, the (temporary?) end of record mortgage rates likely means a less dire outcome: an eventual healthy reversal in house prices, significantly lower consumer spending in two to three years, and a slight increase in missed mortgage payments. .
Mortgage rates in a holding pattern
In the lull ahead of the big Bank of Canada meeting next week, mortgage rates were little changed.
In the short term, it’s possible that if things got bad enough in Ukraine, investors would flock to safe government bonds. This could lower bond yields and potentially ease five-year fixed rates somewhat. But with a worrying consumer price index and rate hikes on deck, the medium-term trend for fixed rates remains bullish.
The rates shown in the attached chart are as of Wednesday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than 20% down payment or those transferring a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1 million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.