Fears of rising mortgage rates are about to translate into reality, as the Bank of Canada (BoC) appears set to raise its overnight lending rate by at least 25 basis points during its July 12 meeting, a likelihood that has sent long-term bond yields through the roof (mortgage rates are partly based on the government’s five-year bonds).
“Nothing is inevitable, but I believe we are on the cusp [of rate rises] given the rise back up in Canadian bond yields over the last few weeks,” said Douglas Porter, chief economist of the Bank of Montreal (BMO). The five-year Canada bond had fallen to just over 0.9% in mid-May, but by Friday was closing in at 1.4%.
Some financial institutions have already begun to quietly raise their discretionary rates over the past week. This is a potentially devastating situation for Canadian consumers grappling with near-record levels of debt.
Economists have been forecasting a rise in rates for a number of years, and it’s been enough of a concern that Ottawa modified the rules for government-backed mortgages to require consumers to qualify based on making potential payments tied to the higher five-year posted rate, which now sits at 4.64%. This is a cushion designed to deal with household debt, which was 166.9% of disposable income in the first quarter of 2017, after hitting a record in 2016.
While long-term rates are expected to rise as early as next week, consumers with variable-rate mortgages tied to the prime lending rate will also immediately feel the sting of any increase from the BoC. Approximately 25% of Canadians still have a floating rate product, according to Will Dunning, chief economist at Mortgage Professionals Canada.
“I do think rates may have already risen as much as they can, given the economic conditions we already have,” Dunning said. “I just don’t think a large increase in rates can be sustained. I also think it takes at least three-quarters of a point [0.7%] before it starts impacting consumers.”