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The increase jolts heavily indebted consumers who took out large mortgages during the pandemic
Article author:
Reuters
Julie Gordon and Divya Rajagopal
Publication date:
July 15, 2022 • 20 hours ago • 3 minutes read • 21 comments Rising interest rates have sent mortgage rates spiraling. Photo by Mark Blinch/Reuters files
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OTTAWA — The Bank of Canada’s surprise rate hike this week jolted heavily indebted consumers who took out large mortgages during the pandemic but were less prepared for the sharp rise in borrowing costs than Bay Street investors.
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Higher interest rates are also putting the brakes on Canada’s once-heated housing market and, as consumers feel the pinch, could slow spending on travel, dining and luxury goods.
The central bank raised its key interest rate by 100 basis points to 2.5 percent on Wednesday, its biggest increase in nearly 24 years. It is aimed at crushing hot inflation, which hit a four-decade high of 7.7 percent in May, with the bank promising more increases to come.
Money markets are betting on three more hikes this year to take rates to 3.5% to 3.75% by the end of the year.
“There’s going to be a lot of pain there. And I think the bank is underestimating the risks to both housing and consumption,” said Stephen Brown, senior Canada economist at Capital Economics.
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There will be a lot of pain there
Stephen Brown, Economist, Capital Economics
The moves have sent mortgage rates spiraling, a concern for Canadians with variable-rate mortgages, which accounted for about 50 percent of new mortgage loans in Canada in May, compared with about seven percent before the pandemic, official data show.
“I’m upset,” said Udit Kumar, who bought a house in suburban Toronto this spring. The interest rate on his variable rate mortgage has already jumped from 1.84 percent to 3.4 percent in just a few months.
“We are now in a situation where our house values can go down and mortgages can go up,” he said.
We are now in a situation where our house values can go down and our mortgages can go up
Udit Kumar, home owner
Most Canadians with variable mortgages have static payments: as rates rise, the monthly payment stays the same, but less principal is paid. But about 20 percent of variable rate loans aren’t static — meaning each increase can add hundreds of dollars to a payment.
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For example, a monthly payment of $2,845 (US$2,171) for a typical home will jump $323 because of the huge increase, according to Lowestrates.ca.
Toronto-area mortgage broker Ron Butler said he’s already hearing from people worried about having to sacrifice groceries to pay their mortgages. But while the situation is painful for many, he doesn’t foresee a wave of defaults because of Canada’s record low unemployment, he said.
“In the history of banking in this country … rising interest rates have not had a huge impact on mortgage defaults. No matter how fast and no matter how big.”
Still, while social media is full of people bemoaning their suddenly huge down payments and plummeting home values, real estate agents say Wednesday’s 100-basis-point hike has put another chill on Canada’s already cooling housing market .
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“Everybody just freezes when it happens,” said Dan Plowman, who owns a real estate agency in Durham, a suburb east of Toronto.
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What the Bank of Canada’s full percentage point increase means for the housing market and your mortgage
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The median sales price in the Toronto area fell 14.1 per cent in June from a peak in February, reversing some of the region’s heavy pandemic gains.
Capital Economics’ Brown expects home prices across the country to fall about 20 percent from peak to trough, and he’s concerned that the Bank of Canada may be too quick to sacrifice the housing market to cool inflation.
But the cooling may be just what the Bank of Canada is looking for. Senior Deputy Carolyn Rogers reiterated Wednesday that rebalancing Canada’s housing market will help curb the excessive demand fueling inflation.
“And that’s what we aim to do,” she said.
© Thomson Reuters 2022
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