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Real estate signs in Mississauga, Ont., on May 24.Nathan Denette/The Canadian Press

The pressure is back on mortgage borrowers after the Bank of Canada raised interest rates for the second time in two months and gave no indication that a break is coming in its quest to squash inflation by increasing borrowing costs.

There were no interest-rate hikes from February through May, which gave variable-rate mortgage borrowers a short reprieve from escalating costs and fuelled a surge in home sales and a surprising jump in home prices, reminiscent of the heady days of the pandemic’s real estate boom.

The Bank of Canada has pointed to the strength of the country’s housing market as a driver of inflation. With this latest increase, the central bank’s key interest rate is now at 5 per cent, a 25-basis-point increase over last month, making conditions more expensive for borrowers, and for new buyers trying to qualify for mortgages. (A basis point is one-100th of a percentage point.)

Calculator: Here's how rising interest rates affect the cost of your mortgage

Realtors and economists predict that the recent surge in housing market activity will now falter. Toronto, the largest real estate market in the country, already shows signs of cooling, with home sales down in June, compared with May.

Debbie Penzo, a realtor who has sold homes in Toronto for more than 30 years, said buyers have become more cautious again. She said there are now fewer offers on homes than there were in the spring, when buyers flooded the market after a January statement from the Bank of Canada that it would take a break from raising interest rates.

“It is making the consumer more cautious about the future and the future potential increases,” she said.

Borrowers who have variable-rate mortgages face looming difficulties. Most of them have fixed monthly payments, which means that every time the central bank raises interest rates, more of their monthly payments go toward interest and less toward reducing the sizes of their original loans. When this happens, their amortization periods – the lengths of time they have to pay back their loans – automatically extend in order to keep their payments steady.

During the four-month reprieve from rate hikes, it appeared that some of these borrowers were able to catch their breath and either make lump-sum payments or increase their monthly mortgage payments to get back on track with their regular amortization periods. From February to April, mortgages with amortization periods longer than 30 years made up more than a quarter of the residential loan books at Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Montreal and Royal Bank of Canada, down slightly from the pervious three months.

But the percentage of borrowers with 30-year-plus amortizations was still more than double the rate in the previous year’s February to April period.

The central bank’s summer interest-rate hikes will continue to stretch amortization periods. The amortizations snap back to their original lengths when the loans are up for renewal, resulting in higher monthly payments.

The Bank of Canada raised interest rates to five per cent on Wednesday, hitting the economy with higher borrowing costs as new projections suggest it will take longer for inflation to fall back to two per cent.

The Canadian Press

The central bank said these borrowers “could be particularly exposed” to higher debt-service costs. “As these borrowers renew their mortgage and return to their original amortization schedule, they could face large increases in payments,” the bank said in a monetary policy report accompanying Wednesday’s rate decision.

During a conference call to discuss the report, the central bank’s senior deputy governor, Carolyn Rogers, responded to a comment from someone on the call that media reports have “overhyped” the predicament of borrowers facing big payment increases at renewal time.

“There’s no overhyping the pain that some Canadians are feeling,” she said.

Some mortgage brokers say the higher interest rates have already created more problems for financially stressed borrowers. One broker, Nicolle Williams, said the June rate hike forced some of her clients to seek loans from alternative lenders, which charge higher interest rates than banks.

But so far there have been no signs that higher interest rates have forced a significant number of people to sell their homes. The number of new listings remains below the 10-year average, and banks’ mortgage arrears rate was at a record low of 0.15 per cent as of April.

The Bank of Canada’s monetary policy report zeroed in on the rebound in the housing market as a reason inflation has not slowed. Home sales have spiked nationally, and the typical home price was up 5.6 per cent over the April to May period, with many parts of Ontario well above that level, according to the Canadian Real Estate Association.

“The faster-than-expected pickup in housing resales, combined with a lack of supply, has pushed house prices higher than anticipated,” the monetary policy report says. It adds that the “previously unforeseen strength” in house prices is likely to persist and boost inflation by the end of the year.

The central bank said Canada’s high immigration levels are creating more demand for housing. But Bank of Canada Governor Tiff Macklem said newcomers to Canada have also helped fill labour shortages, which he suggested could result in a neutral effect on the economy.

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