Fixed mortgage rates are on the rise, mortgage brokers warn
After months of rising housing prices and record-low mortgage rates, the Bank of Canada issued a warning that the real estate market may be starting to overheat. Financial analyst Michael Campbell has more on the consistent strength in the housing market during the pandemic.
After hitting record lows this summer, some mortgage brokers are warning that fixed mortgage rates are starting to climb back up — if only a little.
Just as the housing market gears up for the traditionally busy spring season, lenders across the country are announcing fixed-rate increases of between 0.1 and 0.2 of a percentage point, according to industry experts.
“Any lender who has not yet announced changes to their fixed rates is expected to do so by the end of this week,”
As of Feb.24, the lowest five-year fixed rate available was 1.39 per cent.
“This rate is from a provider who has not yet announced a rate increase. We are expecting our best rate to be 1.54 percent by the end of this week.”
The rate hike would translate into a $32 monthly mortgage payment increase for someone buying a $500,000 home with a 10-per-cent down payment and a 25-year amortization. With a 1.39 per cent interest rate and a mortgage amount of $463,950, which includes the cost of mortgage default insurance, such a homeowner would pay $1,831 a month. With an increase of 0.15 of a percentage point to a mortgage rate of 1.54 per cent, the same homeowner would be paying $1,863 a month, or $384 per year.
The cost increase is minor. But borrowers eager to seize the absolute best deal or worried that rates may rise further can use a mortgage pre-approval to secure current rates.
“Anyone shopping for a home who does not yet have a mortgage pre-approval should get one as soon as possible because it will hold today’s rates for 90 to 120 days.
Rates rising as economic prospects brighten
Mortgage brokers have also been warning that fixed mortgage rates are turning the corner. The upward trend comes as investors start to feel more cheerful about economic prospects and, at the same time, grow increasingly worried about inflation.
While variable mortgage rates tend to move up or down following movements in the Bank of Canada’s trendsetting policy rate, fixed mortgage rates are usually more influenced by conditions in the bond market, which affects lenders’ own borrowing costs.
Encouraging signs for both the Canadian and U.S. economies are stoking concerns about rising inflation and pushing up bond yields, which makes it more expensive for lenders to borrow. The increase in fixed mortgage rates reflects lenders, in turn, adjusting what they charge borrowers.
Optimism about the economy comes as COVID-19 death counts fall, commodity prices hit heights not seen since 2013, and the U.S. inches closer to a massive economic stimulus package.
The yield on five-year Government of Canada bonds, which most heavily influence fixed mortgage rates, is going “straight up. “It hasn’t moved this much within a nine-day span in a decade.
Experts reported seeing “a smattering” of rate increases by non-bank lenders, with others “threatening to hike rates imminently.”
While Canada’s big banks have yet to make a move, if bond yields continue to increase, “it’s just a matter of time. Some economists are also wondering whether the Bank of Canada will soon start to rein in its bond-buying program for Government of Canada bonds, a move that would put additional upward pressure on bold yields and, as a result, fixed mortgage rates.
Canada’s central bank “will likely taper its Government Bond Purchase Program (GBPP) at the April meeting,” CIBC’s Ian Pollick and Sarah Ying wrote in a recent special report.
For now, however, the Bank of Canada has given variable-rates holders little reason to worry. In a recent speech, Bank of Canada governor Tiff Macklem said the central bank remains committed to holding its key interest rate where it currently is until the economy is back on solid footing.
“We have committed to keeping our policy interest rate at the effective lower bound until economic slack is absorbed so that our inflation target is sustainably achieved,” Macklem said.
In its latest economic forecast, the Bank of Canada projected it will take Canada until 2023 to fully absorb economic slack, a measure of unused resources in the economy.
The spread between variable and fixed mortgage rates is about to get “noticeably wider. “It’ll probably get back above half a percentage point, a spread we haven’t seen for two years. That is likely not enough to steer significant numbers of borrowers toward floating rates.
Now, if we see the variable-rate advantage grow to more than one percentage point and the Bank of Canada’s rate hike outlook remains tame, that’s when you’ll see a bigger rotation into variables.
Governor Macklem said the Bank of Canada is starting to see “some early signs of excess exuberance” in the housing market, though not to the degree observed in 2016-2017.
The bank will keep an eye on debt levels, as mortgage debt rises as households pay down other debt like credit cards and personal loans, Macklem said.
“We are acutely aware that in a world of very low-interest rates, there is a risk that housing prices could get stretched, households could get stretched, and certainly that’s a risk we want to guard against,” the governor told reporters following the speech.
Canadians took on $118 billion in additional mortgage debt in 2020, bringing total residential mortgage credit to $1.7 trillion, according to data from Statistics Canada. That represents annual growth of 7.6 per cent, the fastest pace since 2010.
Non-mortgage debt, on the other hand, declined by $12 billion, or 1.5 per cent.
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