The Bank of Canada today delivered a widely expected quarter-point increase to the overnight target rate, raising borrowing costs for millions of Canadians.
Citing an economy that is operating “at capacity” and modest wage growth, the BoC noted in its statement that the “policy interest rate will need to rise to a neutral stance to achieve the inflation target.” That neutral range, it says, is between 2.50% and 3.50%, suggesting additional rate increases of 75-100 bps.
Removed from previous statements was the word “gradual” concerning future rate increases. The BoC said the pace of those hikes will depend on “how the economy is adjusting to higher interest rates, given the elevated level of household debt,” as well as global trade policy developments.
James Laird, co-founder of RateHub and President of CanWise Financial, said the BoC’s statement is a clear signal that additional rate hikes may come faster than expected.
“They haven’t been this explicit in the past one-and-a-half years, even though they moved the rate up five times,” he told CMT. “They are sending a strong signal that rates will continue to move up at a quick pace.”
Benjamin Reitzes of BMO Capital Markets wrote in a research note that “there’s clearly an appetite for a few more hikes from the Bank. BMO’s forecast for hikes in January, April and July is looking pretty good right now.”
What it means for mortgage holders
Hours after the BoC’s announcement, most of the country’s big banks raised their respective prime rates, which brings the country’s prime rate to 3.95%—a 125-bps increase since last summer.
Most adjustable-rate mortgage (ARM) holders and those with lines of credit will see their payments increase as of their next payment date. ARM mortgage holders can expect monthly payments to rise about $12 per $100,000 worth of mortgage.
Variable-rate holders won’t see their payments increase, but they will see the interest portion of their payments jump while their principal portion declines.
The average 5-year variable insured rate available from brokers, as tracked by Mortgage Dashboard, is now 2.88%, up from 2.31% a year ago.
That’s still a sizable discount off 5-year fixed rates, which have risen to an average of 3.43%, up from 2.95% a year ago thanks to the 5-year bond yield (which leads fixed mortgage rates) reaching a seven-year high.
With the current spread between fixed and variable rates, many mortgage shoppers are likely to find themselves asking the perennial question: do I go fixed or variable?
Laird says that in a rising rate environment consumers tend to gravitate towards the security of fixed rates.
“But anyone who plans to pay down their mortgage rapidly can still consider a variable rate mortgage,” he notes. “Even in a rising rate environment the variable is the better choice for those who will aggressively pay down their mortgage. For those who want certainty in their mortgage rate, a longer-term fixed (7- or 10-year) should be considered.”
Rob McLister, founder of RateSpy.com, says historical data doesn’t support ultra-long terms, like 10-year mortgages. But he agrees that variable rates can still be a good bet for new mortgages, if the borrower is financially stable and the rate discount is big enough. “A rate of prime – 1.00%, for example, changes your probability of success dramatically versus prime – 0.60%,” he said.
Over the long term, research shows “variable-rate mortgages win, and the higher rates go, the more they win,” he told BNN today. Still, he cautioned this isn’t always the case.
“Interestingly, in summer 2017 if you would have gotten a bargain 5-year fixed rate mortgage, you’d be way ahead of the game compared to a typical variable-rate mortgage holder today,” based on interest cost alone and assuming no changes to the mortgage since origination.
As for fixed rates, McLister says the hottest deals are in the insured market. That’s a boon for clients with less than a 20 percent down payment, or an already-insured switch. Insured rates remain as much as 35 basis points below the best uninsured rates, depending on the term.
Canadians Becoming Anxious
The five rate increases over the last 15 months, and the prospect of more to come, have more than half of Canadians concerned about managing their debt costs, according to a recent poll from debt consultancy firm MNP. More troubling was a 6% increase since June in the number of Canadians worried that higher interest rates may push them towards bankruptcy (33%).
This coincides with a CBC poll of 1,000 Canadian homeowners this month that found almost three quarters of those with debt on their home—primarily mortgages—say they’re worried about rate hikes.
“It’s now been a year since the first interest rate increase in nearly a decade,” said Grant Bazian, president of MNP’s personal insolvency practice. “As the effects have had time to soak in, more people are feeling the pinch. Of particular concern is there’s an entire generation of Canadians who never experienced a higher rate environment.”