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decoding the mortgage market

Bond yields, which are linked to fixed mortgage rates, have gone to three-year highs in anticipation of more Bank of Canada hikes to come.Fred Lum/The Globe and Mail

The Bank of Canada simply couldn't wait until its October meeting to raise rates. So it jumped at the chance to make a quarter-percentage-point hike on Wednesday. Its impatience should put every mortgage holder on alert.

With Canada's blazing economic growth, the bank is genuinely worried about being behind the curve on inflation and not "normalizing" interest rates quick enough. Despite it saying its next moves will be dependent on economic data, Wednesday's somewhat surprising hike is a tip-off that more could be coming.

For subscribers: Three ways investors will benefit from BoC's rate hike

For subscribers: The beginning of runaway rate hikes? Don't bet on it

Here are 10 other facts and strategies to ponder, now that rates have risen again:

1. Prime rate is now 3.20 per cent, the highest since the financial crisis of 2008. Most variable rates will go along for the ride, jumping a quarter point starting on Thursday. Even fixed mortgages are becoming pricier. That's because fixed rates are linked to bond yields, which have gone to three-year highs in anticipation of more BoC hikes to come.

2. Adjustable-rate borrowers (whose mortgage payments float with prime rate) will see their payments jump about $12 a month for every $100,000 of mortgage balance.

3. Interestingly, we're seeing some lenders try to delay fixed-rate hikes, largely because the mortgage market is slowing and they need the business. That's partly why the best five-year fixed rates are only 0.40 percentage points higher since June 1, despite a 0.70-percentage-point bump in the five-year bond yield. Give it a week or two and fixed rates will close most of that gap.

4. Since 1994 (when the overnight target rate became the BoC's primary policy tool), rates have risen an average of 1.98 percentage points during rate-hike cycles. So far, they're up half a point already. Our admittedly fallible economist friends project rates will jump another three-quarters of a point by the end of next year, but that's far from a given. It only takes one unforeseen crisis for rates to plunge again, be it an oil shock, geopolitical emergency or whatever. In the unpleasant event that the United States and North Korea went to war, for example, yields and fixed mortgage rates could plunge a half point or more in a flash.

5. Inflation ultimately drives mortgage rates and core inflation is still dredging near a multidecade bottom. Unless it rockets above 2 per cent (the BoC's target), there's scant threat of crushingly higher rates. Inflation will continue to be anchored down by vigilant central banks, technological innovation, aging demographics, over-indebted consumers, automation, cheap oil and so on. These are all variable-friendly trends, long-term.

6. If you feel you must lock in your variable mortgage, do it in the next day or two (before five-year fixed rates jump further). Assuming you have a closed mortgage, you'll generally lock in at higher rates than what your lender gives to brand-new borrowers – since your lender knows you can't leave without paying a penalty.

7. Variable rates can still make sense for strong borrowers with a financial cushion or those who might need to break their mortgage early (since variable-rate penalties are usually lower). But to justify the risk of a variable mortgage, look for a rate that's at least two-thirds of a percentage point less than your best five-year fixed option. That buys you insurance against three more rate hikes.

8. For some,the hike marks a sad goodbye as it spells the end of everyday mortgage rates below 2 per cent, for now at least. The lowest non-promotional mortgage rates going forward will be variable rates, starting near 2.15 per cent for default-insured borrowers and 2.35 per cent for uninsured borrowers.

9. It's true that escalating rates weigh on home prices but a quarter-point higher rate lowers a mortgage borrower's maximum theoretical purchase price by just 2 per cent, roughly speaking. If rates surge a point or more, then we'll start getting more worried. Quite honestly, our banking regulator's proposed "stress test" could have an exponentially more negative impact on home prices than the BoC's announcement.

10. If your mortgage rate is below 2.80 per cent, it generally means you're paying more principal than interest. If you can find a four– or five-year fixed rate below this number, consider it an absolute steal, historically speaking.

Robert McLister is a mortgage planner at intelliMortgage and founder of You can follow him on Twitter at @RateSpy

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