Another Bank of Canada Rate Hike Hits Mortgage Borrowers
More Evidence of How Hard it is to Predict Interest Rates
The Bank of Canada raised their overnight rate by 25 basis points (bps) on June 7, 2023, from 4.50% to 4.75%. Their last rate hike in January 2023 came with a statement that they would pause rate hikes for the time being. There is no such assurance this time. Continued economic strength and stubborn inflation mean that the BoC is going to continue to “remain resolute in its commitment to restoring price stability for Canadians”.
The pause in further rate hikes in January was qualified as a “conditional pause”. It appears that conditions have not been met. After assessing the impact of their rate increases to-date, the Bank of Canada feels that this rate increase is warranted.
As a reminder to all those crystal ballers still recently predicting that interest rates would soon decline - and there were a lot of pundits saying this - the Bank of Canada said in January that if they did not see inflation decline as they are hoping for, they are “prepared to increase the policy rate further if needed to return inflation to the 2% target”. While we all hope rates decline soon, it is overly optimistic to suggest it will happen. The Bank of Canada’s statements should have served as notice that the rate hike cycle is not necessarily over, and today’s rate hike was possible.
This news is disappointing to those hoping for relief from high interest rates. Variable mortgage rates will increase 25 bps. Fixed mortgage rates have been increasing recently and spiked again the morning of the BoC announcement. This means fixed mortgage rates are likely to increase again in the coming days. Those new borrowers or renewing mortgage holders that locked-in rates recently will benefit. Those still hanging on to their variable-rate mortgage will pay more. Those with renewals coming up soon, need to prepare for higher payments.
Perhaps this will also silence some of the rate predictions and desires to gamble on interest rates. Smart borrowers should avoid advisors who keep trying to present themselves to the market and their customers as having the ability to know where interest rates are going. They didn’t see this rate increase coming and didn’t predict the dramatic increases in 2022 either. Our advice to mortgage customers is to tune out the advisors who claim to know what will happen with interest rates. Nobody knows. Instead, you should find a practical advisor that focuses on your current mortgage and financial needs as their priority.
Impact of a Prime Rate Increase on the Mortgage Market
The Canadian bank prime rate will increase to 6.95%. The best five-year, uninsured variable mortgage rates are now close to 6%. The yield curve in the bond market is inverted, resulting in variable-rates that are higher than fixed rates and short-term fixed rates higher than five-year fixed rates.
The main impacts of this latest rate hike are:
Existing holders of variable-rate and adjustable-rate mortgages will see the cost of their mortgages increase once again. More importantly the likely duration of this elevated interest rate period appears to be extended. How much higher mortgage rates can rise is an issue, but it is the duration of this rate cycle that will hurt the most. The longer it persists the more pain variable-rate mortgage holders and mortgage renewers will feel;
Existing fixed rate borrowers won’t experience an immediate impact and can be thankful they decided on a fixed-rate mortgage. Those that have a renewal coming up this year will have to deal with a higher interest rate environment. The five-year fixed, insured mortgage rate averaged about 3% in 2018, so those five-year mortgages renewing in 2023 will face more than a 50% increase in rate if the current five-year insured, fixed rate mortgage rates near 5% persist. This is not as severe an outcome as that experienced by variable-rate mortgage holders, but it is still a material change;
New borrowers entering the market are faced with the unusual circumstance where fixed rates are lower than variable rates. As a result, under the mortgage stress test it is now easier to qualify for a mortgage with a fixed interest rate. Locking in a fixed rate now can be beneficial over the long-term because it eliminates interest rate risk for the term of the mortgage. This can be financially beneficial while also providing you the peace of mind of not having to worry about interest rates during the mortgage term. We are currently seeing a significant majority of mortgage borrowers select a fixed-rate mortgage, although most are opting for shorter-term fixed rates;
The higher cost of borrowing today may continue to keep many homebuyers on the sidelines. High house prices combined with today’s higher mortgage rates place homeownership out of reach for many. Buyers that do return to the market will have smaller budgets than they would have had last year;
This rate hike reinforces the uncertainty about the near-term direction of both the economy and the housing market. It is likely to mute activity, holding in check any potential market rebound in 2023.
What Should a Mortgage Borrower Do Now?
A fixed-rate mortgage is the best choice for most borrowers today. Variable rates are too high, and they may go higher if the Bank of Canada raises rates again. A variable-rate mortgage is a gamble on rates that does not make sense for most borrowers.
Many borrowers are opting for shorter term 2 or 3 year, fixed-rate mortgages. This is also a bet on rates, predicting that rates will be lower in 2 to 3 years allowing the borrower to renew at lower rates. Other borrowers prefer to take a five-year, fixed-rate mortgage. This allows them to lock in longer term financing and not have to worry about interest rates for five years. The choice is a personal preference.
If you decide to lock-in a fixed-rate mortgage, please be sure to select a mortgage lender that has fair prepayment provisions and penalties. There is a big difference between lenders, and you should ask your mortgage broker which lenders would treat you fairly if you ever had to break your mortgage.
Are Higher Mortgage Rates Here to Stay?
While the Bank of Canada predicts lower inflation later this year, that doesn’t guarantee that this elevated interest rate environment won’t last. The bond market is forecasting that there will not be a reduction in rates in 2023. The extent of the damage done to the housing and mortgage markets is now dependent on the duration of this higher rate cycle. Higher borrowing costs reduce purchasing power and make the housing market challenging for new buyers at current prices. Meanwhile, stressed borrowers need to maintain their cash flow and direct more resources to maintaining their homes. How long can they sustain that? A weakening economy and extended high-rate environment both threaten their ability to do so. Unfortunately, the market is not predicting any material interest rate relief this year.
How to Find Your Best Mortgage Today?
With rates now higher and changing frequently it has never been more important for you to work with a mortgage broker that has your best interests as their priority. One way to know a mortgage broker places your interest first is they consider risks and opportunities. A mortgage broker that claims they know that rates will decline soon and that you should load up on debt to buy a house is only looking at opportunity – mainly the opportunity for them to earn a commission. Avoid these kinds of reckless advisors and find one that considers the whole picture for you.
We created Frank Mortgage to provide Canadian mortgage borrowers an alternative to the old, traditional ways of getting a mortgage. We have designed a better mortgage experience to help you get your best mortgage deal. We monitor rates daily and are ready to find the best deals for you at any time. We support this with frank and honest advice that is focused on your needs and not on trying to maximize our income. We are free for you to use and ready to assist with house purchase financing, refinancing or mortgage switches. We have access to prime, B and private lenders. Whatever your needs, we can help.
We are here for you to experience a fresh, new way to get your best mortgage without any crazy interest rate predictions. If you want to experience a mortgage process that considers you the priority, then please call us at 1-888-850-1337 or find us online at Frank Mortgage
Don Scott
Don Scott is the founder of a challenger mortgage brokerage that is focused on improving access to mortgages. We can eliminate traditional biases and market restrictions through the use of technology to deliver a mortgage experience focused on the customer. Frankly, getting a mortgage doesn't have to be stressful.
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