What mortgage owners need to know about the Bank of Canada's rate hike

  7/13/2023 |   SHARE
Posted in Mortgages and Real Estate by Vanguard Realty | Back to Main Blog Page

Following the Bank of Canada’s latest interest rate hike, experts say Canadian mortgage owners will feel the impact of higher borrowing costs, either in the form of higher monthly payments, extended amortizations or at renewal. 

On Wednesday, Canada’s central bank increased its policy rate by 25 basis points to 5.00 per cent. The move followed another previous 25 basis point increase in June and brings interest rates to the highest level in 22 years. 

“This is a pretty substantial moment in time,” Leah Zlatkin, a mortgage broker and expert with LowestRates.ca, said in an interview with BNNBloomberg.ca Wednesday. She said this is the first time the nation has seen a Bank of Canada policy rate at five per cent since 2001.

Zlatkin said the Bank of Canada’s decision to raise rates by 25 basis points will increase borrowing costs by roughly $18 per month for each $100,000 borrowed. 

Amid the recent interest rate hike, Zlatkin said she is generally recommending shorter-term fixed mortgage products. 

FIXED-RATE PRODUCTS

Individuals with a fixed-rate product will not experience increases to their monthly mortgage payment, Olympia Baldrich, the vice-president of retail products and real estate secured lending at TD Bank, said in a statement to BNNBloomerg.ca Wednesday. 

However, despite avoiding immediate monthly payment increases, fixed-rate mortgage owners will be impacted at renewal.  

“And while they may not feel the immediate impact of rates rising, they will likely be renewing in a different rate environment from when their term began, so understanding how the rates would impact future budgeting, and planning accordingly, is important,” Baldrich said. 

James Laird, the co-chief executive officer of Ratehub.ca and president of CanWise Mortgage Lender, said in a statement Wednesday to BNNBloomberg.ca that individuals with fixed-rate mortgages should budget “for current market rates” ahead of their next renewal.

“Households should plan ahead to determine where the money is going to come from to make higher mortgage payments,” Laird said. 

VARIABLE-RATE PRODUCTS 

Variable-rate mortgage owners will be immediately impacted by the change in interest rates, either by increases to their monthly payments or by extended amortizations, according to Zlatkin. 

The cumulative impact of 10 interest rate hikes since 2022 has been “fairly dramatic” for variable-rate mortgage owners, Zlatkin said. There are two types of variable-rate mortgage products, she said, one with variable payments and the other with static payments. 

“If you have a static payment, what that means is that your interest rate goes up with everyone else's, but your payment amount doesn't change. So instead, you pay more towards interest and less towards principal and your amortization is extended out,” She said. 

“If you've got variable payments on a variable-rate mortgage, then obviously your payment amounts change as the Bank of Canada's overnight rate goes up or as prime goes up.” 

A mortgage owner who put a 10 per cent down payment on a $729,044 home would have had a monthly payment of $4,248 assuming a five-year variable rate of 5.8 per cent and a 25-year amortization, according to figures from Ratehub.ca.

Following the central bank’s most recent interest rate hike, that same mortgage owner would pay $100 more each month, or $1,200 annually, according to Ratehub.ca. 

AMORTIZATIONS  

Variable-rate mortgage owners whose amortizations are being extended “are not feeling the pain today,” Zlatkin said unless they hit their trigger rate. The “real shock” for those homeowners could come at renewal, she said. 

A trigger rate is hit when a monthly mortgage payment no longer covers accumulated interest since the last payment. 

“When you look at somebody's amortization, they may have started out with a 25-year amortization. And that same consumer today, based on these 10 hikes, might have an amortization of 50 [or] 60 years now,” Zlatkin said.

Drastically extended amortizations could bring uncertainty at renewal, Zlatkin said, as “many of us have never actually encountered this situation before.” 

She said that at renewal people who had longer amortizations may have accrued more interest, as they weren’t paying down the principal of their loan, or they may have to make a “balloon payment.” 

At the time of renewal, Zlatkin said clients with extended amortizations “have to get back down to that 25 years.”

“So your interest rate is higher, the term of time that you have to pay it back is shorter, which makes it a higher payment,” she said.

“And not only that, but you may owe us [the lender] some additional interest. So we're [the lender] going to force you to pay a balloon payment. That could be catastrophic for some people.”

Baldrich said that variable-rate mortgage owners with more of their payment going toward interest and less toward principal may have a higher-than-expected outstanding balance at renewal. 

“Extending to a longer amortization period could be a valid option for some customers, however, they would be subject to credit approval as part of the refinance. If you choose to make a change to your payment schedule at any time, it may also impact your payment amount.” 

She said that individuals can manage interest rate increases by paying higher amounts or by paying more frequently.

HOUSING MARKET

Alana Riley, the head of mortgage, insurance and banking at IG Wealth Management, said in a statement to BNNBloomberg.ca Wednesday that the recent interest rate hike could weigh on the housing market. 

She said that, “fewer people may qualify to purchase homes” and that some buyers may need help from family members. 

Laird said he also thinks the higher borrowing costs will work to cool the nation’s housing market. 

“This hike will put downward pressure on home prices and cause transactions to slow over the summer,” he said. 

Zlatkin said that she is seeing a trend in the real estate market in both the Greater Toronto Area and Greater Vancouver Area. She said that smaller homes, like townhomes or semi-detached units, “seem to be holding really strongly on their value.” 

“And larger homes, so detached homes worth closer to the $2 million mark, those ones seem to be struggling to sell because I think a lot of people are having trouble qualifying for those mortgages,” she said. 

Source: BNN Bloomberg

Bank of Canada, Bank of Canada Benchmark Rate, Consumer Spending, Home Buyers, Mortgage Consumers