This article appeared on the CBC News website on January 20th, 2016 and was written by Sheena Goodyear.
Despite a topsy-turvy mortgage landscape that has seen rates go up unexpectedly, don’t expect your monthly payments to skyrocket any time soon, economists say.
“I think that mortgage rates will remain relatively stable,” CIBC deputy chief economist Benamin Tal told CBC News. “I just don’t see anything that will send them up.”
Mortgage rates have been creeping up over the last few months— a fact that may have many homeowners scratching their heads.
Usually a turbulent economy, like the one Canada is currently facing, with oil below $30 US a barrel and the loonie lower than 70 cents US, would be accompanied by a drop in mortgage costs, especially fixed rates.
That’s because fixed mortgages are tied directly to government bond yields, which are at an all-time low as risk-wary investors steer clear of the stock market.
Still, all the major banks have announced mortgage-rate increases since December.
CIBC increased its three-year fixed rate by 10 basis points to 2.59 per cent. RBC upped its special offer on a five-year fixed mortgage by one-tenth of a point to 3.04 per cent. TD Bank increased its one-year and four-year closed special rates by one-tenth of a point each. Scotiabank increased its variable rate by 10 basis points.
Government regulations and global forces
Robert McLister, a mortgage planner at intelliMortgage and the founder of RateSpy.com, told Canadian Press the hikes stem partly from new government regulations designed to reduce risk in the country’s housing industry, including plans to force the banks to have more money set aside in case the mortgage loans on their books go bad.
“It’s going to be more expensive for banks to hold mortgages,” McLister said. “They have to put aside more capital and when you put aside more capital, then you can’t do other things with it. And that costs you money, so that gets baked into pricing.”
But it’s more complicated than that, said Tal. In order to understand Canadian mortgage rates, you have to look at the global picture.
“Given the uncertainty and given the fact that risk profiles are rising globally, I think that the Canadian banks have to pay more to fund themselves,” he said.
Still, there’s no reason for homeowners and would-be homeowners to fret over modest hikes to already low rates, John Andrew, a real-estate professor from Queen’s University in Kingston, Ont., told CBC News.
“I think the rise we’ve seen in mortgage rates isn’t really very significant,” he said.
Bank of Canada holds key rate steady
Meanwhile, the prime rate — the interest rate commercial banks charge their most credit-worthy customers — is unlikely to change substantially any time soon after the Bank of Canada announced Wednesday it would leave its benchmark overnight rate unchanged at 0.5 per cent.
Changes to the overnight rate — the interest rate at which big banks borrow and lend — have traditionally had major implications for Canadian mortgages, as the big commercial banks would follow in lockstep with changes to their prime rate.
But even if the Bank of Canada had announced a rate change on Wednesday, the impact on mortgages likely would have been minimal. The central bank’s power to influence the housing market has dwindled in recent years, economists say.
When the Bank of Canada slashed the overnight rate by 0.25 per cent a year ago, commercial banks only cut their prime rate by 0.15 per cent.
“That’s maybe something the [Bank of Canada] should look at, because the ability of the bank to really impact market rates and activity is very limited,” Tal said.
Rates will go up eventually
Despite the steady forecast for the next year or two, Andrew advises new homeowners or those looking to renew their mortgages to choose a fixed, or locked in, rate with regular monthly payments that aren’t tied to the prime.
“I’m a little gun-shy about variable-rate mortgages, just because you’re in a period where mortgage rates are so low and there isn’t a widespread expectation in the market that they’re going to rise dramatically,” he said.
“I’m a big one for certainty, and I think the big uncertainty is rising rates. We know they’re going to rise — we just don’t know when and we don’t know by how much. So do you want to get into a variable situation where you’ve got no control over that?”
Marcus Tzaferis, a mortgage broker with MorCan Direct, disagrees. There are good deals on variable-rate mortgages right now, he said, especially from non-bank lenders that won’t penalize you if decide to lock in.
“I’ve been doing this now for about 15 years — nothing happens all that quickly. This tool of inciting some fear that rates are going to go up — it almost works in the banks’ favour. The banks make more money on the fixed rate,” he said. “I don’t think we’re going to see rates increase any time soon.”
Tal said when it comes to fixed versus variable, it all comes down to the individual. There’s no one-size-fits-all for mortgages. But, he warned, the pendulum will eventually swing back, so it’s best to plan ahead.
“If you’re buying right now, it’s very, very likely that five years from now, when you renew, rates will be notably higher,” he said. “If you cannot finance your mortgage at rates that are one to two per cent higher, then you have to think twice about the type of house that you want to buy.”