Variable rate mortgage borrowers face fastest rate hikes since 1990s

Variable rate borrowers are now caught in the fastest rate hike cycle since the 1990s.

And the Bank of Canada made their lives even worse on Wednesday by raising the Canadian key rate by an additional 50 basis points.

If bond market projections are correct, floating-rate mortgagers could face another 50 basis point rate hike at the July 13 and September 7 central bank meetings. And probably another 50 basis points more by December 7th. (There are 100 basis points, or basis points, in a percentage point.)

By the end of 2022, the prime rate could potentially be almost three percentage points higher than in February.

The blow to mortgage payments

Starting Thursday, the prime rate will climb to 3.70% at most lenders.

For someone with an adjustable rate mortgage (ARM), their payment will increase by about $24 per month for every $100,000 in balance, assuming 20 years of amortization remaining.

For people with a variable rate mortgage (VRM), the payments will not change at all, but they will pay more interest and less principal in the future.

Note: Variable mortgages have fixed payments. ARMs do not. But it gets confusing when some lenders call their variable rate mortgages “variable” even though they really are “adjustable.” I can’t tell you how many people I spoke to thought their ARM had fixed payments — or didn’t know their “variable” payments could change.

More rate issues to come

Our central bank says “inflation continues to widen” and “will likely rise further” before “easing off”. He adds that “the risk of high inflation taking hold has increased” amid “widespread labor shortages” and “widening” wage growth.

These worrisome statements, coupled with record high unemployment, healthy consumer spending and the bank’s continued underestimation of inflation, have plagued the bond market.

Investors were so worried that they pushed the yield on five-year Canadian bonds up 13 basis points on Wednesday, as the central bank’s rate hike of 50 basis points had been expected for weeks. Rising yields could push five-year fixed rates closer to 5% this month.

Impact on mortgage approvals

The government’s mortgage “stress test” formula currently makes it easier to get approved for a variable rate mortgage compared to a more conservative five-year fixed mortgage. Indeed, choosing a five-year fixed rate limits your theoretical purchasing power by nearly 10% compared to a variable rate.

This is bad policy and I expect the government to fix this design flaw soon.

Quick advice

If you have an ARM and want to continue paying the same principal amount as before Wednesday’s hike, just call your lender and ask them to increase your payment. But note that many lenders limit you to one payment increase per year.

CMHC shifts downside risk to first-time buyers

The government’s idea of ​​“shared equity” is changing, at least in terms of its much-maligned first-time home buyer’s incentive (FTHBI).

CMHC quietly announced on Wednesday that it will “limit its share of a home’s depreciation…to a maximum loss of 8% per year” for users of its shared stock ownership plan. (There was no limit until now.)

The government appears keen to limit potential losses for FTHBI as home values ​​face their biggest potential drop in years. Canada’s chief banking regulator, Peter Routledge, told the Herle Burly podcast in February that some real estate markets could sell off by as much as 20%.

“My main reaction to the news is that it will only serve to further drive down participation rates in the program,” said Paul Taylor, Managing Director of Mortgage Professionals Canada. “I’m also disappointed that CMHC is announcing the changes on their effective date. Making this change without any public delay seems very poor. »

CMHC also said it would cap its share of rising house prices at 8% after “comments from Canadians”. But what do you think is more likely over the next 12-24 months, a further 10-20% gain in national average house prices or a 10-20% correction? I will have more next week.

Mortgage rates this week

It may be the calm before (another) storm, but rates have barely budged this week. Nationally, the lowest uninsured one- and four-year fixed rates jumped 10 basis points, but that was about it.

With the increase in the prime rate this week, the average discounted variable mortgage rate from national lenders will climb to around prime minus 0.60%, or 3.10%.

You can still find brokers online with one-year terms at 2.99% (insured) or 3.29% (uninsured) – a decent game considering the potential for additional upsides of over 150 basis points by the end of the year.

According to a new CIBC survey, 36% of variable rate people “say they are likely to switch to a fixed rate in the next 12 months.” That’s probably not a good idea, at least since they’re moving to a five-year fixed. When fixed rates climb 250 basis points, history suggests a high probability of a reversal within two to three years. But probability is not certainty: the period from 1973 to 1981 showed us that history does not always repeat itself.

The lowest mortgage rates available nationwide

1 year fixed 3.59% RBC 2.99% True North
2 year fixed 3.84% RBC 3.29% True North
fixed 3 years 4.09% Alterna Bank 3.79% True North
4 years fixed 4.09% Alterna Bank 3.99% True North
5 years fixed 4.14% Alterna Bank 3.99% Marathon
10 years fixed 4.94% HSBC 4.44% nesto
Variable 2.39% HSBC 1.99% HSBC
5 year old hybrid 3.37% HSBC 3.54% Scotia eHOME
HELOC 3.05% HSBC N / A N / A

Rates are as of Wednesday from providers who advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than 20% down or those transferring a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1 million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.

Thanks for reading Mortgage Rundown, a brief overview of the Canadian real estate finance landscape from Robert McLister, interest rate analyst, mortgage strategist and editor of You can follow him on Twitter at @RobMcLister.

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