Over the last few years, buying a home has never been easier. Ultra-low mortgage rates – often in the two to three percent range – have helped many Canadians buy new homes and keep their monthly payments manageable. Low rates, though, have also played a part in fuelling the nation’s home prices: since 2008 the average Canadian home has risen by 60%, while the posted five-year fixed mortgage rate has fallen by 37%.
When it comes to finance, what goes down tends to come back up and as a result of changes to government regulations and increasing bond yields, it looks like mortgage rates are finally starting to rise. Here’s how rising rates might impact you.
Many of us like to talk about the Bank of Canada’s overnight rate, or the Federal Reserve’s Fed Funds rate, both of which are short-term lending rates. It’s the rate that central bank governors can directly control and the one they discuss when they hold their regular meetings.
However, it’s not the rate that impacts mortgages most. Rather, it’s the five-year Government of Canada bond yield that causes fixed-term mortgage rates to rise and fall, says Robert McLister, founder of the mortgage rate comparison website RateSpy.com.
The five-year yield has climbed from 0.48% in February 2016 to 1.13% at the end of the year, which has helped push mortgage lending rates higher.
Why the five-year bond? Because most mortgage terms are for five years and companies raise the money they lend by selling GICs, deposit notes and mortgage backed securities with a similar maturity.
Variable mortgage rates, however, can be priced at the prime rate or at a discount to the prime rate, which is set by financial institutions. The discount is determined by a lender’s short-term funding costs so the rate you pay can fluctuate throughout the term, says McLister.
Last year, the Canadian government decided that it needed to do something to cool the hot housing market and ensure that Canadians aren’t taking on more debt than they can handle.
It instituted new insurance restrictions and bank capital requirements, including a ban on insurance for refinances, extended amortizations and $1 million plus properties. These changes are making it more expensive for lenders to securitize or hold mortgages on their balance sheets, says McLister. “And that extra cost is being passed on to the consumer through higher rates,” he says.
As well, buyers must also now make a down payment of 20 percent or qualify for the Bank of Canada’s posted five-year fixed rate, which is currently 4.64%.
When taken together, these government rules “reduce competition for low-ratio mortgages,” says McLister, which then causes rates to drift higher.
The Trump effect
While Donald Trump’s election has buoyed stock markets, it’s also driven up long-bond rates in the States and in Canada – yields often climb here when rates in the U.S. rise. Bond markets are reacting to a potentially more inflationary environment under the new president.
“Trump is one of the most pro-growth presidents the U.S. economy has ever witnessed. Financial markets believe his tax cuts, infrastructure spending, deregulation and other policies are inflationary,” says McLister. “And when inflation expectations jump, bond yields rise.”
Since he was elected on November 8, the Canadian five-year bond yield has risen by about 0.4%. That has, in part, caused some banks to raise their prime rates on variable rate mortgages and rates on fixed-income mortgages, in some cases by between 0.25% and 0.4%.
What this means for you
With mortgage rates increasing, it makes it harder for first-time homebuyers to enter the real estate market. New buyers will be left with the choice to wait and save up more money for their down payment, or find a less expensive place.
However, there are still low mortgage rates to be had. Ken Walus, Assistant Vice-President of Mortgages at Investors Group, says that even if you don’t have the required down payment, and must qualify for a mortgage at the Bank of Canada’s posted rate, many lenders still offer variable or fixed rate mortgages that are below 3%.
But it’s not just the rate that matters, he says. Mortgages need to fit your lifestyle, too. If you want peace of mind about the mortgage rate you’ll be paying for the next five years, a fixed rate mortgage may be the right choice. If you are financially comfortable to wait and see what happens, a variable rate might be the answer.
“No one should be losing sleep over their mortgage rates,” says Walus. “Whether it’s a fixed or variable mortgage rate, you have to be confident that you’ve made the right decision.”