The Bank of Canada was up to its old rate tricks this week, lifting borrowing costs for the 10th time in 16 months. Here are five ways it just changed the mortgage landscape, again.
McLister: This week’s lowest fixed and variable mortgage rates in Canada
1. Rate floaters are nearing the end of their rope
The BoC’s quarter-point rate boost will jack up most floating-rate mortgage payments. For new adjustable-rate borrowers, whose payments rise and fall with the prime rate, they’ll pay around $45 to $55 more per month, depending on their rate and amortization – assuming an average Canadian mortgage balance of $349,178, according to credit reporting agency TransUnion.
For existing borrowers, the impact depends on the mortgage type and lender. At the nation’s biggest mortgage lender, RBC, for example, someone with that average mortgage balance and a 20-year amortization would see their monthly payment rise $72.75, the bank says. That assumes they’ve already exceeded their “trigger rate,” meaning their payment wouldn’t have covered all the interest due. When this happens, RBC raises payments just enough to cover the extra interest cost.
Variable-rate borrowers are sheltered at banks like BMO, CIBC and TD. They usually don’t require payment increases until customers accrue large amounts of interest. The banking regulator doesn’t like this; it seems to prefer RBC’s method. So this week, The Office of the Superintendent of Financial Institutions (OSFI) announced new capital rules to discourage “negative amortizations” whereby the mortgage amount keeps growing as interest accrues. If the regulator’s plan works, all banks may require borrowers to at least pay all their interest each month. That would expose future variable-rate borrowers sooner to soaring interest rates.
2. Getting a Home Equity Line of Credit (HELOC) just got tougher
The qualifying rate – also known as the HELOC “stress test” rate – is the highest it’s been since 1995. That means, at some lenders, you now have to prove you can afford payments at a mortgage rate of almost 10 per cent. To get the lowest nationally-advertised HELOC rate, presently from HSBC, you’ll be stress-tested at 9.2 per cent. This compares with just 5.25 per cent 16 months ago. Compared with then, you now have to earn an additional $35,000 or more per year to get a standard HELOC for 65 per cent of the average home value.
3. The fixed-variable rate spread just widened
With the prime rate climbing to a 22-year high on Thursday, variable rates are even higher than fixed rates, at least initially. The gap between the lowest nationally available variable rate and fixed rate is now 81 basis points. (A basis point is 1/100th of a percentage point.) Moreover, the Bank of Canada is now projecting that it will take an extra six months to get inflation back to target, versus the timeline it forecast in April. To the extent the BoC convinces Canadians rates will stay higher for longer (which it’s trying to do), more mortgage shoppers may opt for two- and three-year fixed rates where there’s an upfront rate advantage.
4. More borrowers will call their banks for help
Hundreds of thousands of floating-rate mortgage borrowers have little or no discretionary cash left for payment hikes. Increasingly they’re tapping credit and savings to make mortgage payments, but both sources are finite. With this latest BoC hike, you can bet more folks will ask their lender for payment relief. That’s especially true now that the government is publicizing it as an option, openly asking banks to make exceptions to lower payment burdens for struggling borrowers. If you’re one of them, be aware that most banks make you prove hardship.
5. The path for home prices just got murkier
In the last 48 hours, much ink has been spilled on how home prices may react to this 10th rate hike in 16 months. Higher rates don’t help home prices. Neither does the spurt in active listings we’re seeing in some cities.
But assuming we don’t get another unforeseen inflation shock, the more the Bank of Canada hikes, the more likely it is that fixed rates will drop.
Yes, drop. That’s because the bond market will eventually say enough is enough. It’ll anticipate that hikes will slow the economy, which drives down bond yields, pushing down fixed mortgage rates.
Consider that:
Few mortgagors are going variable these days.
Fixed rates may fall.
Employment is still rising (for now).
People feel we’re closer to the end of hikes than the start.
Many home shoppers regret not buying during the dip this year.
People know there’s more demand than available inventory.
For all these reasons, BoC hikes may take prices down a few notches, but real estate will hold up better than it did in 2022.
Rates are as of July 13, 2023, from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
Robert McLister