Lenders Increase Fixed Rates Again to Nearly 4.5%

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Following a jump in bond yields last week, lenders across Canada raised their fixed mortgage rates.

The major banks like RBC, TD and BMO increased their 5-year fixed rates by 20 to 25 basis points, with all three offering uninsured rates at 4.39%.

The move follows a nearly 10 basis points jump in the Government of Canada’s 5-year bond yield, which leads to 5-year fixed rates. On Friday, the 5-year bond yield closed at an 11-year high of 2.88%. However, since the beginning of the year, bond yields have been up to over 165 basis points.

Among national lenders, the average uninsured 5-year fixed rate is now 4.37%, up from 3.92% a month ago, according to data tracked by Rob McLister, rate analyst and editor of Mortgage Logic. The average rate for an insured 5-year fixed mortgage with a down payment of less than 20% is now 4.14%, up from 3.78% a month ago.

Even though your interest rates may be fixed, they’re still going up approximately 40 basis points in just one month. A 50 basis points rate increase translates into a $25 higher monthly payment per $100,000 of debt, based on a 25-year amortization.

While this doesn’t impact most borrowers, new borrowers and those renewing a mortgage face significantly higher rates than just several months ago and potentially double for those renewing a mortgage.

As fixed rates march higher, variable rates are likely to jump again following the Bank of Canada’s next rate decision meeting on June 1st. It is set to increase interest rates by 50 basis points following their next meeting on June 1st, which could bring prime rate (the variable-rate mortgage and line credit pricing) up to around 3.70%.

How will rising rates impact mortgage borrowers?

Aside from higher monthly payments, how will these rising rates impact mortgage borrowers?

“As interest rates march higher—we expect the overnight rate to hit 2% by October, a projection that increasingly looks conservative—borrowing costs for Canadians will also rise, leaving the average Canadian household to spend almost $2,000 more in debt payments in 2023,” say economists from RBC Economics.

“This will erode spending power, especially for the lowest-earning fifth of households which spend 22% of their after-tax income on debt servicing (including mortgage principal and interest payments),” they add.

On the other hand, RBC notes that the pandemic helped improve savings among Canadian households.

“The pandemic may have boosted debt, but it also left Canadian households sitting on $300 billion in savings,” the RBC economists wrote. “That’s a huge backstop—enough to cover about a year and a half of total Canadian household debt payments.”

How will rising rates impact home prices?

The housing market is feeling the impacts of recent changes made by the Bank of Canada and

“Tomorrow’s homebuyers are going to have a much harder time paying today’s prices if they were paying 5% on their mortgage compared to the low 2% range just a few months ago and the high 1% range a year ago,” wrote real estate analyst John Pasalis, president of Realosophy Realty, in a recent post on move smartly.

Pasalis noted some argue that this isn’t a concern since many borrowers have been qualifying at a stress test rate of at least 5.25%. Still, he suggests that’s an oversimplification of the situation.

The mortgage stress test is currently used to qualify borrowers at the greater of the buyer’s actual mortgage rate plus 2% or the benchmark rate, which is currently 5.25%.

“As these are dynamic measures that will change as rates do, the stress test will also increase, which will reduce the amount of debt a buyer can take on,” Pasalis writes, adding that the contract rate influences how much mortgage debt the borrower is willing to take on.

“A buyer who qualifies for a $1M mortgage may be willing to take on that much debt when interest rates are 1.75%, but less so when rates are 4% because, under the higher rate, their actual mortgage payment would be roughly $1,100 per month higher,” he wrote.

As a result, if interest rates continue to trend higher, Pasalis says he “would not be surprised if we see some downward pressure on home prices over the next 9 to 18 months due to homebuyers being unwilling or unable to pay today’s prices at tomorrow’s higher interest rates.”

Although, he adds that any price decline would “likely be a temporary one due to long-term fundamental factors that have been contributing to rising home prices.”

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