Good thing Canadian mortgage borrowers have been stress tested, because it’s game time. Fixed rate mortgages have already climbed aggressively with market expectations. However, variable rate mortgage interest costs have lagged until recently. Now they’re expected to make up for lost time, doubling over six months. With rising inflation expectations, it might climb even further.
Canadian Variable Rate Mortgages Forecast To Reach 4% In Early 2023
Canadian variable rate mortgages respond to the Bank of Canada (BoC) overnight rate. As the overnight rate climbs to cool inflation, variable interest costs will too. BMO estimates the current rate to be around 2.25%, after this week’s 50 basis point (bp) climb. That’s a substantial move from the 1.5% rate borrowers paid at the start of this year. By next year it’s expected to climb even higher.
By next year, variable rate mortgage interest will be more than double, according to BMO. Costs are forecast to hit 3.25% by mid-July 2022, and climb to 4% by the start of 2023. Going from 1.5% to 4% won’t be fun, though it’s important to realize the climb isn’t a punishment. Over the past two years, borrowers received a discounted rate on interest as an incentive to borrow. The rate is still well below the rate most buyers were stress tested to pay.
Canadian Fixed Rate Mortgages Have Mostly Completed Their Climb
Five year fixed-rate mortgages aren’t tied to the overnight rate but move with the bond market. The Government of Canada (GoC) 5 Year Bond yield, in particular, influences the rate. Interest costs on these mortgages were about 2% in the first half of 2021, estimates BMO. Now it’s in the range of 3% to 4%, after the GoC Government Bond Yield climbed 150 bps since last year. Most of the climb has already been completed, with the bank seeing another 20 bps by next year.
Higher mortgage rates tend to reduce the amount of leverage home buyers can carry. Since this reduces the number of qualified buyers and pushes many further out, demand falls. If demand falls faster than inventory does, this can result in price declines, as a number of economists have begun forecasting. Though if demand remains strong due to a robust labor market, it can buck the trend — it’s worth watching closely.