Get used to it, Canadian homeowners. If, as many analysts expect, the Bank of Canada raises interest rates tomorrow morning, it could be a sign of things to come.
And it’s been a long time coming. Seven years, in fact.
The Bank’s influential rate has sat at .50 per cent since July 2015, when it dropped from 0.75. And you have to go all the way back to September 2010 for the last increase, when BoC raised it to 1.00 per cent from 0.75.
The years of prolonged historical low rates may be over.
“If we see the Bank make a move on Wednesday, most analysts are predicting a 0.25-per-cent increase,” James Laird, co-founder of RateHub.ca and president of CanWise Financial, told NextHome. “There are some who believe more increases are expected over the course of the next year, potentially leading up to a full one-per-cent hike by the end of 2018.”
What does it all mean? For some homeowners, it could mean a reset.
“It depends on the homeowner and how financially prepared they are,” says Laird. “The government has tried to ensure some stability for borrowers with new mortgage regulations over the last couple of years. A 0.25-per-cent increase is fairly moderate and shouldn’t impact most homeowners too severely.
“If we see a full percentage point increase over the next year, that could mean about $250 more per month for some variable rate holders, for example. That’s certainly a significant change to many people’s monthly cost of living. People should consider their ability to take on added costs and always prepare accordingly.”
VARIABLE-RATE MORTGAGES MOST AT RISK
So, who’s most at risk?
In short, homeowners with variable rate mortgages, who will feel an immediate impact.
For example, someone who purchased a home priced at $750,000 in June with a variable rate, would see their monthly payments go up about $100 with a 0.25-per-cent increase.
The rate hike will be most challenging for those who have over-extended themselves and taken on too much debt. The average homeowner, however, should feel confident they can absorb this increase.
FIXED-RATE MORTGAGES SAFE?
Does this mean fixed-rate mortgages are safe from an increase? Not so fast, says Laird.
“Since the Bank of Canada started making comments in mid-June, bond yields have risen 50 to 60 per cent, and therefore we’ve already seen fixed rates increase across the board. If the Bank makes comments alluding to another increase in the future, we may see fixed rates continue to rise.”
The major banks, meanwhile, are likely to pass on any increase announced tomorrow straight on to homeowners.
“When the Bank decreased the overnight rate from 0.75 to 0.50 per cent in 2015, all banks eventually responded by decreasing their rates by just 0.15 per cent,” says Laird. “With an increase, however, we expect the full amount to be passed along to consumers. This will only immediately affect those with variable rate mortgages, including HELOCs.”
Some experts are forecasting the Bank may raise the overnight rate a full percentage point by the end of next year. The best five-year fixed rate on RateHub.ca in February 2014 was 2.99 per cent. If a full percentage point increase is realized by early 2019, we could see average five-year fixed rates sit closer to where they were between 2000 and 2010, at approximately 3.89 per cent.
A consumer who purchased a home in 2014 priced at $500,000 (with a down payment of 20 per cent amortized over 25 years) with a five-year fixed rate of 2.99 per cent, will have $341,833 remaining on their mortgage by February 2019. If five-year fixed rates increase to 3.89 per cent, they would see their monthly mortgage payment increase at renewal from $1,891 to $2,046. That’s a difference of $155 per month, or $1,860 per year.
VARIABLE RATE SCENARIO
Someone who purchased and closed a home priced at $750,000 (with a down payment of 10 per cent amortized over 25 years) in June 2016, at the current best five-year variable rate of 1.75 per cent, would have a total monthly mortgage payment of $2,864. If the banks adjust their prime rates quickly following a Bank of Canada overnight rate increase of 0.25 per cent, by August that homeowners monthly mortgage payment would be $2,947. That’s an immediate increase of $83 per month, or $996 per year.
Analysts are predicting as many as three increases by the end of 2018 (assuming 0.25 per cent each time). If this proves to be true, the same mortgage consumer by the end of next year would see their monthly payment increase to $3,118. That’s a total increase of $254 per month or $3,048 a year.