Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
The Bank of Canada’s historic 100-basis-point rate hike on Wednesday is no joke for housing and mortgage borrowers. Here are 10 ways it may cost, or save, you a bundle:
1. Buying a home ‘on sale’
If you want to buy a house “on sale” the Bank of Canada just made that more likely. A 100-basis-point rate hike markedly boosts the probability of lower prices by year-end. Most importantly, it slashes purchasing power of mortgagors by more than 7 per cent, based on the lowest available federal stress test. That means a household making $100,000 and getting a 30-year amortized mortgage with 20 per cent down will see their maximum theoretical purchase price drop by roughly $44,000, to $554,000. Canada’s average home price was $711,000 in May according to the latest industry data.
2. Refinancing a mortgage
If you’re refinancing, a tougher mortgage stress test also cuts your maximum qualifying mortgage amount by more than $35,000, based on the above assumptions. Falling appraisal values will further slash loan amounts because refinances are generally limited to 80 per cent of one’s property value. Non-federally regulated lenders, which don’t use the same stress test as banks, will let you borrow more, but may pay over 50 to 100 more on your rate for the privilege.
3. Variable rate mortgages
Among the 35 per cent of Canadians with mortgages, more than 90 per cent will see no immediate impact on their monthly payments, the bank says. But those who are renewing a five-year variable mortgage next month will see a roughly 185 bps boost in their rate. Five-year fixed renewers will see their rate jump about 235 bps. That’ll boost payments roughly $77 and $103 a month respectively, per $100,000 borrowed. (There are 100 basis points, or bps, in a percentage point.)
4. Five-year fixed rate mortgages
Five-year fixed rates will start looking more attractive to some folks as the gap between the lowest fixed and variable rates shrinks from to 204 bps Wednesday to 104 bps Thursday. But don’t bite on a long-term fixed rate unless you’re highly intolerant of rate increases. Yes, the prime rate could easily shoot up another 150-plus basis points. But there’s a better than even chance your average rate in a variable will be lower over the next five years, for reasons I touch on below.
5. Bond market pricing
At the time this is being written, bond market pricing implies a prime rate of between 5.95 per cent and 6.20 per cent sometime in the next year. That would take most new variable rates well above 5 per cent. Knowing that, if you’re getting a new mortgage today but don’t want to lock in long term, a one-year fixed (as low as 4.29 per cent from RBC as of Wednesday) could save you considerably more than a variable if your mortgage is large.
6. A ‘soft landing’?
Don’t bet on the “soft landing” the central bank is shooting for. There’s no historical precedent for the Bank of Canada slashing inflation about six percentage points without triggering a recession. With recession comes significantly higher unemployment, and that too, is bearish for home values. Just remember that strong rate medicine now is also bearish for mortgage rates, eventually. That should save Canadians from a 1970s scenario with years of extreme borrowing costs.
7. Rising inflation
The Bank of Canada sees inflation averaging well over double its 2-per-cent target in 2023. That means you can’t bank on rate cuts next year, despite the market hinting otherwise. But with Canada’s yield curve inverting, you should still expect lower five-year bond yields. That could potentially lower fixed mortgage rates from today’s 14-year highs. (An inverted yield curve – where long term bond yields are lower than short-term yields – often signals a recession.)
8. The gap between fixed and variable rates
The gap between fixed and variable rates is closing fast. Canada’s lowest widely available uninsured mortgage rate will jump to about 4.09 per cent (prime rate minus 0.61 per cent) on Thursday. That’s about one percentage point below competitive five-year fixed rates. Ironically, the smaller that spread between fixed and variable rates, the more people will choose fixed. That’s usually the exact opposite of what most mortgagors should be doing near the top of a rate hike cycle. The only way locking in would prove right this time is if inflation is dramatically more persistent than anyone expects.
9. Better investment deals
Investors should expect better deals to come on mortgage company stocks, some of which are pricing in severe recession and credit default risk. Investors typically overreact to such risk, driving down prices and driving up dividend yields. Mortgage defaults should start climbing within six months, but it won’t get ugly enough to put any federally-regulated lenders out of business. As with real estate, buying the dip will eventually make sense.
10. High-interest savings rates
And finally, a little good news to close things off. An overnight rate that is 100 bps higher means that the best high-interest savings rates will jump, potentially 70 to 75 bps or more according to recent trend data from HighInterestSavings.ca. “Generally, the savings account rates are not going to rise as much as the BoC rate, and if they eventually catch up, they’ll do so slowly,” says Peter Keung, the website’s founder.
Biggest mortgage lender in U.S. comes to Canada
Rocket Mortgage, the mammoth U.S. online lender known for its “push button, get mortgage” tagline, is coming to Canada. It is rebranding Edison Financial, its wholly owned Windsor, Ont.-based mortgage broker subsidiary, as Rocket Mortgage (rocketmortgage.ca) effective Aug. 8.
Rocket spends roughly US$1-billion a year marketing in the U.S. and closes more mortgages than all Canadian lenders combined, based on currency-adjusted value. But its impact in Canada will be proportionately more limited. Its in-house lender, launching later this year, will rely on its competitors, Canadian banks, for much of its funding.
Hash Aboulhosn, who heads up Rocket’s Canadian operation, says customers should generally expect 24-hour or less approval times, business-hour responses to online inquiries “in minutes,” quicker closings and competitive interest rates (but not the lowest interest rates).
Unlike Rocket’s customers in the United States, Canadians won’t yet be able to finalize a mortgage without speaking to a human. But either way, a new lender with Rocket’s backing means more competition, and that never hurts anyone … but competitors.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
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