Borrowers will get some relief after the Bank of Canada kept its key interest rate steady Wednesday, but the housing market is not expected to rebound as quickly as it did in the spring, as the central bank left the door open to further rate hikes.
In announcing that its benchmark interest rate would hold at 5 per cent, the bank said it continues to be concerned about inflation and is “prepared to increase the policy interest rate further if needed.”
Since it raised rates in June and July after a four-month break in the spring, homeowners with variable-rate mortgages have had to pay more interest to service their loans.
In some cases, borrowers have seen their loan balances grow because their monthly payments are not covering all the interest owing. That unpaid interest is added to their loan balances, which is known as negative amortization.
Wednesday’s decision means variable-rate mortgage holders will have about two months to adjust to the summer’s higher interest rates. The central bank’s next interest-rate announcement is scheduled for Oct. 25.
“This is a short-term sigh of relief,” said Tuli Parubets, a mortgage agent with Mortgage Scout. But Ms. Parubets said borrowers have a “constant looming fear” that the central bank will resume raising rates later this year and that they will lose their homes if they cannot keep up with the higher payments.
Financial disclosures from some of Canada’s big banks show how the June and July interest-rate hikes ratcheted up the stress on variable-rate borrowers with fixed monthly payments. Three major lenders had about 20 per cent of their domestic residential portfolios in negative amortization as of the end of July.
Bank of Montreal and Canadian Imperial Bank of Commerce disclosures show that share of their portfolios was up from April. Toronto-Dominion Bank disclosures show that the percentage of negatively amortizing loans was higher than in July, 2022.
The banks have said that some of their clients are taking steps to ensure that their mortgages are amortizing – decreasing in size. They are doing this by making additional payments, increasing their monthly payments or switching to a fixed-rate mortgage.
Realtors said the pause on interest rates will be seen as positive for many would-be homebuyers. But they also did not think there would be a repeat of the February-to-May period, when buyers rushed back into the market and drove up sales and prices in a mini buying frenzy. That quickly subsided after the rate hikes in June and July. Sales slowed, and home prices have started to fall in the Toronto region, the largest real estate market in the country.
“Because the bank did leave the door open for further hikes, it is certainly possible that some of these people will continue to leave their buying decision on hold until we get a few more readings on inflation and the Bank of Canada’s reaction to these inflation reports at the end of October,” said Jason Mercer, chief market analyst with the Toronto Regional Real Estate Board.
In addition to the interest-rate uncertainty, more homeowners have been putting their properties up for sale. New listings across the country have neared historic levels after this spring’s 20-year lows.
Fixed-mortgage rates are higher than they were in the spring. The average five-year fixed rate was 5.94 per cent in early September, according to Mortgagelogic.news, a mortgage analysis firm. That is up from 5.19 per cent in March. And the economy has weakened, with the jobless rate increasing and economic output slowing.
BMO senior economist Robert Kavcic said these three factors would dampen any housing rebound. “A Bank of Canada pause will surely help market psychology, but the headwinds look stiffer,” he said in a research note.
Rachelle Younglai