Rising interest rates have been a menace to your finances like the Toronto Maple Leafs have been a Stanley Cup threat.
But the safely ignorable days are over for interest rates, and maybe my Leafs as well. No need to panic, homeowners and buyers. But recognize that there is now a crack in the foundation of the most important economic support for housing. Interest rates are rising in the United States and there will be a spillover here.
The U.S. Federal Reserve pushed rates higher by just 0.25 of a percentage point, which is negligible. But the Fed also estimates three rate increases next year, up from previous guidance that called for two increases. This sets a trend for rising rates that could easily boost Canadian mortgage costs.
Mortgage rates are guided mostly by the interest rate on bonds. The rate on the five-year Government of Canada bond has doubled since the summer, a huge move by bond-market standards. Some lenders have already increased rates on five-year fixed-rate mortgages, far and away the top choice of mortgage holders today. Now, we wait to see how much further rates climb.
The Bank of Canada website is a good way to track what's happening with government bonds. (Find it here). Scroll down to the five-year bond and note how the zig-zag pattern of the past 12 months recently gave way to an upward surge. If that trend continues, prepare for higher mortgage rates.
The latest numbers on indebtedness in Canada show households owe $1.67 for every $1 of disposable income, which is an averaged number that reflects people with little or no debt and financially struggling families. One way to find out where you stand is to see how you would bear up if the Fed's outlook for rates is right on and the trickle-down impact on Canadian mortgage rates is a modest 0.5 of a point.
You should be able to handle that. Payments on a $300,000 five-year, fixed-rate mortgage rise by $76 a month if the rate rises to 3 per cent from 2.5 per cent. On a $500,000 mortgage, payments rise by $126 a month, or $29 or so a week.
You can cut $29 from your weekly spending in all kinds of ways. Bring your lunch to work a few days a week and do your coffee-drinking at home. That should do it.
The wrong approach is to spend like always and then find yourself short as a result of higher mortgage costs. When you do that, you raise the possibility your extra mortgage costs will come out of savings or, worse, that you need to borrow from your line of credit to cover the cost of your expenses and lifestyle.
Think of your finances as a zero-sum proposition – if more money goes to your mortgage, it has to come from somewhere. Start planning now so you have a strategy in place if you have to renew a fixed-rate mortgage at a higher rate.
Warnings such as this have been flying around for years. If you dismissed them, you were as right as the people who laughed off the brief moments in which the Leafs seemed to get their act together. But there's more of a sense of urgency to the latest developments on rates than there has been in the past.
Before, the Fed was assuring people rates would stay low for as long as needed to support the economy. Now, the message sounds more aggressive. Gradual rate hikes are still foreseen, but the pace has quickened.
If you're renewing a mortgage in the next six months, talk to your lender about how to speed up the process so you can capitalize on current rates. People in the market to buy a house should lock in a rate right now – up to 120 days might be possible. Or consider taking a breather on your house search to see if rising rates have an effect on prices. Economists have been saying for ages that only two things can shake the housing market – higher rates or an economic shock that sends the unemployment rate higher. The housing market has its tipping point and any rate increases ahead bring us closer to it.
The field of behavioural finance tells us people have a tendency to base their expectations for the future on what has happened in the recent past. That never works for long – in mortgage rates and maybe hockey as well.
Rob Carrick