Canadians looking to buy a home can expect mortgage rates to soon be on the rise, experts say.
The Bank of Canada’s is a good indication of why, said Don Drummond, economist at Queen’s University and former chief economist for TD Bank. The Bank of Canada announced Wednesday that while its current policy rate remains steady at 0.25 per cent, it will likely increase as early as the second quarter of next year.
According to Drummond, mortgage rates are bound to follow suit, particularly variable ones.
“The variable rates will go up quite quickly, they could even go up in anticipation of the bank action,” Drummond told CTVNews.ca in a phone interview on Thursday.
He predicts the Bank of Canada’s short-term interest rate will increase by about 0.75 percentage points by the end of 2022. Eventually, he anticipates the rate will be anywhere between 1.75 and 3 per cent by the end of 2023, which he describes as a more “normal” rate. He expects variable mortgage rates to move up in lockstep.
“The variable rate is keyed off the chartered banks’ prime rate, and the prime rate is keyed off the Bank of Canada’s policy rate, so the variable rate would move up to the same degree,” he explained.
Robert Hogue, a senior economist with the Royal Bank of Canada, predicts an increase of closer to 0.5 percentage points in the central bank’s interest rate by the end of next year, but sees a rise in variable mortgage rates nonetheless as a result.
Fixed-rate mortgages are more of a wild card, as they aren’t impacted by the Bank of Canada’s actions in the same way. Still, there are signs of these fixed mortgage rates starting to increase as well.
“Fixed rates have already started to move higher, we’ve seen this over the past several months,” Hogue said in a telephone interview with CTVNews.ca on Thursday.
Fixed-rate mortgages are linked to bond yields, Hogue explained, which involve longer-term interest rates, and bond markets will anticipate future moves by central banks. He forecasts that the average rate of a five-year government of Canada bond yield will likely increase by 0.5 percentage points as well by the end of 2022.
“We do expect that the overnight rate will rise, and at the same time, we do expect that bond yields will continue to creep higher throughout the year,” he said. “In both cases [fixed and variable rates], these will have upward implications on mortgage rates.”
While these increases may be concerning to some homebuyers, Drummond says they’re necessary.
“We should want [interest rates] to go up,” he said. “This is causing a lot of imbalances, it’s putting the entire world in massive quantities of debt and that's going to come back to hound us if we don't put an end to that.
“Unfortunately, people won't see that because they've lived through the lowest rates in history.”
Drummond points to a reality currently faced by many homebuyers, including his own daughter – bidding wars due to low supply in available houses on the market. While moving from Saskatoon to Aylmer, Que., his daughter was up against 15 bidders at one point for one property. His fear, he says, is that houses are being bought for well above what their market value will be in six to 12 months. While house prices still haven’t come down by much, Drummond does note some improvements.
“There are still some bidding wars going on, but they're much more isolated than they were over the summer months,” he noted.
Hogue says that mortgage rates have fallen to historic lows, creating a red-hot housing market. Rising mortgage rates will help cool things down.
“We think the housing market that has already cooled from incredibly strong levels at the start of this year, will continue to cool over time through the remainder of this year and into next year,” Hogue said.
His advice to new homebuyers facing these increases: start by speaking to a specialist.
“Everyone's situation is different,” Hogue said. “Everyone needs to make a well-educated decision whether to pick up a loan, become a homeowner or continue to rent.”
Drummond’s advice is slightly more cautionary.
“Try to keep the principal as low as you can...pay down that principal to lower your exposure,” he said.
When deciding whether to go fixed or variable, Drummond says that historically, those who go variable have ended up paying less interest over the course of their term. But it really comes down to risk appetite, he says.
“If you're the cool and calculated person who plays the tables of Las Vegas with some success and don't have a heart attack in the process, stay with a variable rate, but if you’re the kind of person that gets the craps table…don't do it.”
Finally, anticipate that rates are going to go up.
“There's a generation of young people who are hooked on super low mortgage rates and they have come to believe that that is a norm. But that is not the norm.”
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