Costs are set to rise again for those with a variable payment
The Bank of Canada’s latest rate increase will have come as unwelcome news for scores of Canadian borrowers, many of whom will see their monthly payments jump as a result of the hike.
The central bank appeared to have hit pause on its rising-rate trajectory in March, leaving its benchmark rate untouched for two consecutive announcements, but introduced a 25-basis-point increase last week amid persistent inflation and a resilient economy.
Many borrowers on variable-rate mortgages are bound to be jaded by the Bank’s series of rate jumps, according to a prominent mortgage executive, particularly as the end appeared to be in sight where rate increases were concerned.
“Anyone who has a variable rate that has a variable payment would be fatigued by these rate hikes,” James Laird (pictured top), co-CEO of Ratehub.ca and president of the Canwise mortgage lender, told Canadian Mortgage Professional.
“I’m sure they thought that hopefully they were over earlier this year. And there have been times when people have been forecasting even a rate cut late this year or early next year. So that’s definitely off the table right now – and those households are having to tighten up their budget even further to… make those higher mortgage payments now.”
How troubling is high household debt to the Canadian economy?
Canada’s national housing agency has recently sounded the alarm on high levels of household debt and the risks they could pose in the event of a global recession, although Laird said he believed a majority of borrowers would still be able to cope with higher rates.
“I continue to think that household finances will be strained, but unless something has changed related to the employment within the household – so basically, unless someone has lost their job – I think people will be able to make their mortgage payments,” he said.
“Some tough decisions will have to be made. That might be putting less money aside and saving less, [activities] will have to be cut back… but unless someone’s lost their job, then people should still be able to make their mortgage payments.”
Deputy Governor Beaudry discussed our latest interest rate decision with @nojoudalmallees of the @CanadianPress.https://t.co/5p8X6gFyJo
— Bank of Canada (@bankofcanada) June 9, 2023
#cdnecon
That’s due in large part to the fact that even after the latest hike, rates are still in and around the stress test levels at which many borrowers were required to prove they could qualify for, he added – meaning most borrowers will be able to absorb the shock of higher payments, even if it may be painful to do so.
“When you think about it, really what the Bank of Canada wants to see is less of that discretionary spending,” he said. “They do want you to go out for dinner a little bit less, they do want you to cut back a little bit on all of your spending. That’s what they’re looking to see. So with more money having to go to the mortgage, it should move towards the Bank’s desired result.”
While the Bank’s latest decision sees variable rates climb higher, fixed rates have also been on the up in recent weeks, with five-year Government of Canada bond yields – a key indicator of where fixed rates are headed – having risen in anticipation of a move.
Was the Bank of Canada’s new rate hike a surprise?
It had been largely expected that the central bank would keep rates steady in its last announcement – but the hike wasn’t especially surprising, according to Laird, with inflation remaining stubbornly high, the labour market continuing to add jobs and GDP growth outperforming Statistics Canada’s expectation.
“Any measure that the Bank cares about is running hotter than they had forecast, from consumer spending, economic growth, inflation, housing activity to core inflation,” he said. “Every measure they look at is not flowing down the way that they thought it would when they announced their conditional pause in January, so I get it.”
The bad news for borrowers struggling with the impact of higher rates: further increases could be on the way, Laird said, including a possible jump in July.
“They continue to emphasize that they’re going to be data driven and they will get [inflation] back to 2%, and they’re going to do what they have to do to get there,” he said. “So I think depending on what data comes out between now and early July, it’s certainly possible that another hike happens if we get continuous hotter data than the Bank has forecasted.”
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