An impending interest-rate hike is likely to cool the Canadian housing market to some extent – but higher borrowing costs won’t be enough to significantly dampen demand for housing, according to the Desjardins Group’s latest Spotlight on Housing report.

“A slowdown is expected, particularly among first-time buyers. For others, the impact will be felt when they renew their mortgage loans,” said Hélène Bégin, senior economist at Desjardins Group.

In the report, Bégin outlines the impact the Bank of Canada’s (BoC) overnight rate hike would have. As recently as a month ago, most analysts forecasted that the BoC would hike rates no earlier than early 2018. Many are now hurrying the timeline, with economists at the Desjardins Group now seeing the possibility of a rate hike as soon as July.

According to Bégin, borrowers with variable-rate loans will face higher debt servicing costs. “An interest rate hike will have an immediate effect on holders of variable-rate loans and personal lines of credit,” she said.

On the other hand, many borrowers with fixed-rate mortgages won’t be impacted right away. This is because fixed-rate mortgages track in line with yields on government bonds spanning the same period. Hence, a five-year fixed-rate mortgage largely reflects the yield on a five-year bond (banks use bonds to fund mortgages).

“For fixed-rate mortgage loans, the effects will be spread out over their maturities, as [the] highest interest rates will be required at renewal based on the term initially chosen,” Bégin said. In other words, those consumers who have their rates locked in won’t see their debt-servicing costs rise until they have to renew their mortgages.

On the downside, first-home buyers will be harder hit than other types of borrowers. This is because such borrowers tend to put forward smaller down payments than other borrowers.

“[However] the economic situation remains favourable for households in Quebec and Ontario,” Bégin said. Both provinces are seeing growth in the number of jobs, while their respective unemployment rates have generally trended downward since 2010.

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