Good Morning!
One more sleep before the highly-anticipated Bank of Canada rate decision.
Whether Governor Tiff Macklem and his deputies pull the trigger Wednesday or not, it seems pretty certain rates will rise within the next few months.
So the real question now is how much the Bank might hike in this cycle and what it means to mortgage holders.
James Laird, co-founder of Ratehub.ca and president of CanWise Financial mortgage brokerage, says lenders in Canada have already started to move their variable and fixed rates higher in anticipation of a Bank of Canada hike.
“However there are still some lenders who have not yet increased rates. Therefore, if you require a mortgage in the next 120 days, it’s best to apply quickly to hold today’s rate,” he said.
Sung Lee, an RATESDOTCA expert and mortgage agent, is also seeing rates rise. Fixed-rate insured mortgages are now ranging from 2.44% to 2.79%, while a few months ago clients were able to get sub-2%, he said.
“It’s possible that we might even see a reduction in variable-rate discounts on top of prime rate increases. Rising rates will have a big impact on borrowers as the cost to access credit continues to get more expensive,” said Lee.
If the Bank raises its overnight rate by 25 basis points tomorrow, a homeowner with a five-year variable rate mortgage of $649,530 at 0.85% amortized over 25 years would see monthly payments rise from $2,404 to $2,477, according to Ratehub.ca’s mortgage calculator.
That’s $73 more per month or $876 per year on their mortgage payments.
If the Bank raises the rate by 50 basis points, monthly payments would rise to $2,551. That’s $147 more per month or $1,764 a year.
If those mortgage amounts sound high, remember that in December 2021, the average house price in Canada was $713,542.
The mortgage market will no longer be able to hide from higher rates this year, says BMO senior economist Robert Kavcic.
“Canadian mortgage rates are like a coiled spring set to unwind, but by how much?” he wrote in a note this week.
“On the five-year fixed side of the market, underlying GoC yields could easily point to further upside of roughly 50 bps or more. On the variable side, 100 bps or more of BoC tightening is in the cards over the course of this year.”
That could mean a rise in the mortgage rate the market is priced off from 1.8% at the end of 2021 to 2.7% by the end of 2022.
As of Monday, the market had priced in up to seven rate hikes by the end of the year, which would bring the Bank’s rate to 2%, according to Bloomberg data.
But some economists think this timeline is too steep.
Stephen Brown of Capital Economics finds the market pricing puzzling, because it assumes the Bank of Canada will hike faster and further than the U.S. Federal Reserve, even though inflation is higher in the States.
Moreover, the makeup of Canada’s economy with its “over-dependence” on interest-rate-sensitive housing is very different from its southern neighbour.
Capital believes that the risks will force the bank to pause its tightening cycle at 1.5%, about 50 basis pointer lower than what the market expects.
Analysts at Pacific Investment Management Co. see the central bank moving just four times this year, in line with expectations for the Fed, reports Bloomberg.
Canada’s high household debt and slack remaining in the labour market despite the jobs recovery will prevent the Bank from pushing rates too far, too fast, Vinayak Seshasayee, a portfolio manager overseeing Pimco’s Canadian fixed-income assets told Bloomberg.
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