Variable rate borrowers are now caught in the cycle of fastest rate hikes since the 1990s.
And the Bank of Canada made their lives even more uncomfortable on Wednesday, raising Canada’s key interest rate by another 50 basis points.
If the bond market projections are correct, floating rate mortgage lenders may need to withstand a further rate increase of 50 basis points at both the central bank’s meeting on July 13 and September 7. And probably another 50 bps more by December 7th. (There are 100 basis points or bps in percentage points.)
By the end of 2022, the base rate could potentially be almost three percentage points higher than in February.
Wound for mortgage payments
As of Thursday, the base rate will climb to 3.70 percent for most creditors.
For someone who has an adjustable rate mortgage (ARM), their payment will jump about $ 24 a month to a balance of $ 100,000, assuming the remaining amortization of 20 years.
For people with a variable rate mortgage (VRM), payments will not change at all – but they will pay more interest and less principal in the future.
Marginal note: Variable mortgages have fixed installments. ARM no. But it is confusing when some lenders call their floating rate mortgages “variable”, even though they are actually “adjustable”. I can’t tell you how many people I’ve talked to who thought their ARM had fixed payments – or who didn’t know that their “variable” payments could change.
More pain awaits us
Our central bank says “inflation continues to rise” and “is likely to move even higher” before it “eases.” He adds that “the risk of rising inflation has risen” amid “widespread labor shortages” and “widening” wage growth.
These worrying statements, along with record low unemployment, healthy consumer spending and continued underestimation of inflation by the bank, have disrupted the bond market.
Investors were so concerned that they raised Canadian five-year bond yields by 13 basis points on Wednesday, although the central bank had been expecting rates to rise by 50 basis points for weeks. Rising yields could push five-year fixed rates closer to 5 percent this month.
Influence on mortgage approval
The government’s “mortgage stress test” formula currently makes it easier to approve a variable rate mortgage than more conservative five-year fixed mortgages. Choosing a five-year fixed rate actually reduces your theoretical purchasing power by almost 10 percent compared to a variable rate.
This is a bad policy, and I expect the government to resolve this design error soon.
If you have an ARM and want to continue paying the same amount of principal as before Wednesday’s hike, simply call your creditor and ask them to increase your payment. But note that many lenders limit you to one increase in payment per year.
CMHC shifts the downside risk to buyers for the first time
The government’s idea of ”shared capital” is changing, at least in light of its highly slandered incentive to buy a home (FTHBI).
CMHC quietly announced on Wednesday that it will “limit its share of house depreciation to a maximum loss of 8 percent per year” for users of its shared capital scheme. (So far, there have been no restrictions.)
The government seems to be trying to limit potential losses from the FTHBI, as home values are facing the largest potential decline in recent years. Canada’s chief banking regulator Peter Routledge told Herle Burly in a podcast in February that some real estate markets could sell up to 20 percent.
“My primary response to this report is that it will only serve to make the participation rate in the program even lower,” said Paul Taylor, CEO of Mortgage Professionals Canada. “I am also disappointed that the CMHC will announce the changes on the day they take effect. It is very bad for me to make this change effectively without public lead time. “
The CMHC also said it would reduce its share of home price growth to 8 percent after “feedback from Canadians”. But what do you think is more likely in the next 12 to 24 months, a 10% to 20% further increase in national average home prices or a 10% to 20% correction? I’ll have more about it next week.
Mortgage rates this week
It may be quiet before the (next) storm, but rates have hardly moved this week. On a national basis, the lowest uninsured one- and four-year fixed rates jumped 10 basis points, but that’s it.
With the base rate rising this week, the average discounted variable mortgage rate among national lenders will climb to about 0.60 percent, or 3.10 percent.
You can still find online brokers with annual terms at 2.99 percent (insured) or 3.29 percent (uninsured) – a decent game given the potential of another 150 bps increase by the end of the year.
According to a new CIBC survey, 36 percent of people with a variable rate “say they are likely to switch to a fixed rate in the next 12 months.” That’s probably not a good idea, at least to the extent that they switch to a five-year marker. When fixed rates skyrocket at 250 bps, history suggests a high probability of a turnaround within two to three years. However, probability is not certain: The period 1973 to 1981 showed us that history does not always repeat itself.
Prices are Wednesday from providers who advertise rates online and lend in at least nine provinces. Insurance rates apply to those who buy with less than 20% down payment, or to those who transfer an existing insured mortgage to a new lender. Uninsured rates apply to refinancing and purchases over $ 1 million and may include applicable lender rate premiums. For providers whose rates vary by province, the highest rate is indicated.
Thank you for reading Mortgage Rundown, a quick look at Canadian housing finance by Robert McLister, interest rate analyst, mortgage strategist and editor. MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
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