Fears of rising mortgage rates are about to become reality, and some financial institutions have already quietly raised their discretionary rates in the past week, a potentially harsh reality for Canadian consumers grappling with near-record debt.
The rising rate environment comes as the Bank of Canada seems set to raise its overnight lending rate by at least 25 basis points at its July 12 meeting, a likelihood that has sent long-term bond yields soaring. Mortgage rates are partially based on the government of Canada five-year bonds.
“Nothing is inevitable, but I believe we are on the cusp (of rates rising) given the rise back up in Canadian bond yields over the last few weeks,” said Doug Porter, chief economist of the Bank of Montreal. The five-year Canada bond had fallen to just over 0.9 per cent in mid-May, but by Friday it was closing in on 1.4 per cent.
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Rob McLister, the founder of ratespy.com, said his bank contacts have told him that rates were going up Thursday and Friday for some customers, though none of the major financial institutions has publicly announced rate changes. “All the big banks are raising their discretionary rates by 15 basis points at least. I’d suggest they go up on the websites next week,” he said.
An increase in rates has been forecast by economists for a number of years, enough of a concern that Ottawa changed the rules for government-backed mortgages to require consumers to qualify based on making potential payments tied to the higher five-year posted rate, which is now 4.64 per cent. That’s a cushion designed to deal with household debt, which was 166.9 per cent of disposable income in the first quarter of 2017 after hitting a record a year earlier.
McLister said banks were offering discretionary rates as low as 2.54 per cent to 2.59 per cent on a five-year fixed rate contract, but that range is now closer to 2.69 to 2.74 per cent. Some brokers last week were still offering rates as low as 2.18 per cent on a five-year fixed rate, mostly by lowering commissions.
“One thing I would point out is we are basically where we were when we started the year,” said BMO’s Porter about the rising rate environment.
While long-term rates are expected to raise as early as next week, consumers with variable rate mortgages tied to the prime lending rate will also immediately feel the sting of any increase from the Bank of Canada. Will Dunning, chief economist to Mortgage Professionals Canada, said about 25 per cent of Canadians still have a floating rate product.
“I do think rates may have already risen as much as they can given the economic conditions we already have,” said Dunning. “I just don’t think a large increase in rates can be sustained. I also think it takes at least three-quarters of a point (0.75 per cent) before it starts impacting consumers.”
One interesting wrinkle for consumers, if the Bank of Canada does raise rates 25 basis points, is whether financial institutions follow suit with a similar increase in their prime lending rate, which has tended to track the overnight lending rate. On the way down, over two recent 25 basis-point cuts by the central bank, financial institutions only lowered their prime rates 15 basis points each time, boosting their long-term spread by .20 per cent.
Justin Thouin, the chief executive and founder of lowestrates.ca, still believes a variable rate mortgage is the best way to go on your mortgage given the historical proof that over the past 20 years consumers with floating rate debt have done better.
“With debt-to-equity ratios in Canada, the Bank of Canada will simply not be able to raise the rates significantly enough,” said Thouin, who does expect financial institutions to match any increases with a similar hike in prime.
One impact a jump in rates may have is to spur some potential home buyers into jumping into the market, said Christopher Alexander, Regional Director, RE/MAX INTEGRA Ontario-Atlantic Canada Region.
“I think all the people who have a rate hold could jump in,” he said, referring to the pre-approval mortgage practice of financial institutions guaranteeing a rate for as long as 90 days.