The US Federal Reserve raised its interest rate on Wednesday for the third time in six months to the highest level since the GFC hit in the fall of 2008.
The Fed’s latest show of faith in the strengthening US economy follows Bank of Canada Governor Stephen Poloz’s comment that “the interest rate cuts [the BoC] did two years ago have done their job.”
Taking on a mortgage is about to become more expensive on both sides of the border, even if Poloz’s hint about a looming Canadian rate hike 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,” Ian Macfadyen, a mortgage broker, told CTV News. “Ultra-low [mortgages] are probably, for the most part, over.”
As the saying goes, when the United States sneezes, Canada gets a cold. US interest rates, and its impact on Canadian mortgages, are no exception.
Fixed-rate mortgages, which are the most common type of mortgage in Canada, are tied to long-term Canadian bond prices, which are in turn tied to US bond prices. Banks sell bonds to raise money to lend to mortgage holders. When the Fed raises rates, bond prices usually fall, and when this happens, banks tighten their lending and mortgage rates rise.
The prospect of a pricier mortgage is a major concern for prospective homebuyers like Eric Samure. The 28-year-old chartered accountant said he’s been saving to purchase a house in Ottawa for more than two years. He would have to make 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 believes that the era of cheap money is drawing to a close. He suggests the rates on offer today are as good as they’re going to get for the next several years.
“The message should be if you are getting a mortgage to go fixed. 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,” he said.