August 25, 2019

What to Do as Mortgage Rates Are On the Rise?

What to Do as Mortgage Rates Are On the Rise?

Chris MacDonald

For many millennials, or those looking to become homeowners for the first time, the interest rate one will receive on the mortgage they lock in today can play a huge role in determining the state of one’s household finances for years to come.

Given new stress tests put in place by Canadian regulators looking to ensure the housing market does not become overheated and remains somewhat affordable for the working class, those who have managed to scrape together a down payment may still not be able to afford the higher rates one will need to be able to qualify for under the new rules.

Adding fuel to this fire, this week both Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) announced that they will be raising their benchmark interest rates as of this week, in response to higher borrowing costs reflected in a rising five-year Canadian Government Bond Rate.

While TD has committed to a 45-basis-point increase, Royal Bank has indicated it will be raising its benchmark by 20 basis points for its five- and 10-year rates, with its one and four year products seeing an increase of 15 basis points and its variable rate closed mortgages decreasing by 15 basis points.

For homeowners considering a variable rate mortgage as the way to go, consider other borrowers who have been hit with rising interest rates in recent years as central banks have begun to tighten.

While locking in a mortgage may now turn out to be a more expensive exercise, it appears the hiking schedule in Canada and the U.S. may be picking up speed, making future decisions even more costly.

Invest wisely, my friends.

Albertans would be hardest hit by interest rate hikes, Royal Bank says

Mortgage debt in Alberta rose almost 30 per cent on average from 2010 to 2016

Rajeshni Naidu-Ghelani · CBC News 

Alberta residents are also holding more shorter-term mortgage debt than other Canadian households, according
 the RBC. (Reuters)

Households in Alberta will feel the most pressure from rising interest rates, because residents in the province carry the highest debt loads in the country, according to a new report from the Royal Bank of Canada.

Alberta residents would see the biggest increase in debt-service payments in Canada — over $1,200 a year on average — if interest rates rose by one percentage point, said Robert Hogue, senior economist at RBC Economic Research in a report on Tuesday. That’s the amount of money needed to make payments on the principal and interest on outstanding loans.

The Bank of Canada has already hiked interest rates three times since mid last year, raising the key lending rate by a total of 75 basis points to 1.25 per cent.

 “Households in B.C. and Ontario are also more indebted than the national average, but Albertans carry the heaviest debt loads,” Hogue said.

“A booming provincial economy and strong income gains between 2011 and 2014 emboldened households in Alberta to buy homes (sales growth averaged over 10 per cent per year in that period) and accumulate significant debt, leaving them with high debt loads when incomes dropped following the plunge in global oil prices.”

Hogue added that Alberta residents are also holding more shorter-term mortgage debt than other Canadian households, but higher-than-average incomes offer them “some breathing room.”

Higher incomes in the province are a “mitigating” factor, Hogue said as debt service payments accounted for over 15 per cent of disposable income in 2016, which is just a bit more than in B.C.

How much debt?

But on average, household debt in the province rose from $164,000 in 2010 to $192,000 in 2016, according to the report.

“These numbers include households who are debt-free, so actual outstanding balances for those carrying debt are even higher,” Hogue said.

Mortgages accounted for the majority of debt that Alberta households carried, with the average going up to $124,000 in 2016 from $96,000 six years earlier. That’s a nearly 30 per cent jump.

Meanwhile, debt-service payments in the province are already the highest among all Canadians at an average of $15,300 per household in 2016.

That compares to $13,700 paid by B.C. residents, and $12,600 paid by Ontario households on average. The overall average for Canadians in 2016 was $11,600.

“These amounts aren’t pocket change. In Alberta, for example, the $1,200 no longer available for spending on everyday goods and services — or saved for future consumption. It would exceed what households spend on entertainment ($1,000) or furniture ($800) each year,” said Hogue.

“Their debt-service bills will get bigger, and possibly sooner than elsewhere in the country, when interest rates rise. It’s bound to cause many households to spend more cautiously on other goods and services.”

This could potentially hold back economic growth more in Alberta, B.C. and Ontario than in other provinces, Hogue warned.

Canadian household debt as a share of income remained near a record high in the fourth quarter, according to the latest figures from Statistics Canada in March, as home sales fell in the previous month.

Meanwhile, markets are pricing in a nearly 70 per cent chance that the Bank of Canada will raise interest rates again in July.

U.S. Fed closing the door on low-rate mortgages in Canada: experts

Jeff Lagerquist, CTVNews

The U.S. Federal Reserve raised its trend-setting interest rate on Wednesday for the third time in six months to the highest level since the global financial crisis hit in the fall of 2008.

The Fed’s latest show of faith in the strengthening U.S. economy comes as Bank of Canada governor Stephen Poloz suggests “the interest rate cuts we did two years ago have done their job.”

Simply put, taking on a mortgage is about to become more expensive on both sides of the border, even if Poloz’s hint that a Canadian a rate hike is on the horizon turns out to be unfounded.

“Interest rates are rising in the U.S. and it doesn’t take long for that to filter into Canada,” mortgage broker Ian Macfadyen told CTV News. “Ultra-low (mortgages) are probably, for the most part, over.”

As the saying goes, when the U.S. sneezes, Canada gets a cold. U.S. interest rates and the impact on Canadian mortgages are no exception.

Fixed-rate mortgages, the most common in Canada, are tied to long-term Canadian bond prices, which are in turn tied to U.S. bond prices. Banks sell bonds to raise money to lend to mortgage holders and other borrowers. When the U.S. Federal Reserve raises rates, bond prices typically fall. As bond prices fall, banks tighten their lending, and mortgage rates rise.

For example: if current interest rates rise, giving newly-issued bonds a yield of 10 per cent, older issues yielding 5 per cent would not be in demand until their price falls to match the same return generated by the new prevailing interest rate.

The prospect of a pricier mortgage is a major talking point for prospective buyers like Eric Samure. The 28-year-old chartered accountant said he has been saving to buy a home in Ottawa for more than two years, and will have to weigh some tough choices if borrowing becomes more costly.

“You could bite the bullet and buy a place you can’t afford, or you can just save up longer. I’m taking the approach to save up longer so it’s affordable,” he said.

Macfadyen predicts the era of cheap money is drawing to a close. He suggests the rates on offer today are as good as they are going to get for the next several years.

“The message should be if you are getting a mortgage to go fixed,” he said. “If you are going to refinance, roll in as much of your debt into a lower fixed rate, otherwise you will be susceptible to rises in interest rates.”

Many economists are predicting the Bank of Canada will hike its overnight lending rate for the first time in nearly seven years by the end of 2017.

David Rosenberg, the chief economist at Gluskin Sheff + Associates, is in that camp. He believes Canada’s economy has moved past two of the bank’s justifications for keeping rates at record lows.

“They brought in two emergency rate cuts totaling 50 basis points in 2015 to deal with an energy price shock. You know that is behind us,” he said. “And an Alberta recession, that is in the rear view mirror.”

Rosenberg said Poloz has surprised the markets with rate moves in the past, and could start raising Canada’s key lending rate as soon as July.

“The question you have to ask yourself is why now he is starting to talk more openly about the possibility of taking back two rate cuts that we don’t need anymore,” he said. “Why wouldn’t he move in July?”

That looming decision, and the rate hike south of the border, has Samure and his partner thinking about how to scale back their dream home. But two years of careful saving have only strengthened their resolve to enter the housing market the moment they can afford it.

“It’s going to go up just a little bit now, maybe in six months it’s going to go up even more,” he said. “You can predict how much you save, but you can’t predict the outcome.”