Canada

Canadian Mortgage Costs Are Surging and Renting Can Make More Sense: First National

Canadian real estate is quickly changing as inflation drives bond yields much higher. First National, one of Canada’s largest non-bank mortgage lenders, warned rates are surging. Neil Silverberg, a senior analyst with the lender, wrote to clients explaining how fast yields have increased and how this will impact ownership. More Canadians are expected to stay put or consider renting in the near-term, as the market adjusts.

Mortgage Bond Yields Climbed Over 1 Basis Point Per Day In 2022

Canadian mortgage yields are rising very fast. To emphasize this point, First National explains only 139 days have passed this year. Yields for both the 5- and 10-year GoC and Canada Mortgage Bond (CMB) have increased over 1 basis point per day, on average. Silverberg doesn’t see yields continuing at this breakneck speed, but does see more room to grow.

Rising Bond Yields Are Driving Mortgage Rates A Lot Higher

Surging bond yields have driven residential mortgage lending much higher in 2022. According to the lender, a 5-year conventional mortgage went from 2.94% at the start of the year to the current 4.84%. “That is an increase of almost 200 basis points in less than 5 months,” explained Silverberg. 

That adds up to a significant increase for borrowers that might be stretched. “If you had a mortgage totaling $1million with a regular amortization period of 25 years, monthly payments would have gone from $4,702 to $5,726 in a matter of months,” he said.

Higher Mortgage Payments Will Make More Consider Renting

Higher mortgage payments will push more to consider renting a property. As rates rise to non-stimulus levels, borrowers will pay more interest. This reduces the amount towards loan principal and allocates more to interest costs. Both rising payment size and interest costs will create more incentive to rent. 

Higher lending rates tend to reduce home prices, but that takes an adjustment period. In the meantime, if home prices fall more people will be deterred from buying.

“Does a payment change of over $1,000 a month on a $1mm mortgage or $500 a month on a $500k mortgage get people thinking about renting instead? The answer is yes. This is especially true when mortgage rates move up faster than housing prices move down,” said Silverberg. 

Rising rates won’t just encourage those with more modest incomes to consider renting. A few weeks ago, PIMCO exec and bond expert Mark Kiesel said he may considering selling his home to rent. He previously sold his home at the top of the US housing bubble and bought at the bottom, nearly timing the trade perfectly based largely on the bond market. While he’s in the US, similar monetary and valuation conditions exist in both regions. 

Granted, US real estate isn’t at the extreme seen in Canada.

7 Comments

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  • JM 1 month ago

    … A lot of assumptions made there. If you rent from a larger, institutional organization/REIT, maybe your rent hasn’t increased…
    If you want decent, non-slum housing with 1/2 decent people you probably rent from someone directly (their 2nd property or what-have-you). My rent has increased massively in the past 2 years, as have prices across the board, not to mention a lack of availability, not due to unit number, but due to these HELOC-financed, 2nd, 3rd property owners greed in the last couple yrs.

    The greedy get greedier and want more for rent. Most of us get screwed.

    • Philip Barton 1 month ago

      I seriously doubt that anyone who can afford a $1million mortgage will be bothered by a $1k a month increase. On a $500k mortgage an increase of $500 a month is not going to make those people want to sell and rent instead.

    • Karl 1 month ago

      100 percent. Hopefully all the “investors ” will have huge losses, no sadness on any carnage for those who have made this bubble and profited off others all in the name of money and the free market.

  • Jason 1 month ago

    As a new immigrant why bother coming to Canada?

    • Jappan Singh 1 month ago

      Depends on from which country you are coming.

  • Woolsock 1 month ago

    Absolutely. Any houses for rent right now costs your first born per month and there’s just not a lot of them to begin with. Any old-timey landlords have cashed in their chips, requiring the renter to cover the new owners’ massive (probably 100% borrowed) debt. It’s ugly.

    We’re in the process of looking right now and our choices are crap high-rise apt block or crap low rise apt block. Really demoralizing, and that’s before all the invasive checks that make you feel like a criminal just because, so far, you’ve decided not oblige the banks and go $500-700k into debt.

    I’ve even started looking at sailboats because, with our stuff in storage for the summer, why the heck not? Can’t get through these freaky times fast enough.

  • Paul 1 month ago

    I disagree with the assumptions made here. If people are cash strapped how would they even enter the housing market?? Also typo in your hyper link.

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