Higher interest rates can hurt many homeowners

Higher interest rates can hurt many homeowners

The Bank of Canada is expected to raise its key interest rate on Wednesday, and to do so several times between now and December, and possibly beyond, depending on the economic situation.

Homeowners should expect higher monthly payments

For example, for a $300,000 mortgage loan, an interest rate increase of 0.5 percentage point represents an increase of $90 per month, or more than $1,000 per year.

In the country, about a quarter of mortgages have variable rates. But in the past year, the Canadian Mortgage and Housing Corporation asserts, the number of people who have used this type of loan has increased.

Tara Purasa Ochoa, chief economist for housing research at CMHC.

Photo: Radio Canada

In 2021, there was a fairly big gap between the variable rates and the fixed rates, and the variable rates were much lower, so for some, more attractive, and so we have the majority of Canadians, last year, even at the beginning of this year, who decided to opt for a variable rate.، Tara Bowers-Ochoa, senior economist for housing research at CMHC.

For these owners, the coming months will witness some unpleasant surprises. Either the amount of the mortgage will increase, from period to period, so we will see that because the rate of interest will go up, or there are other cases where the ratio of capital to interest will change.explains Tara Bowers-Ochoa.

Fixed price feature

According to Jean-François Perrault, Senior Vice President and Chief Economist at Scotiabank, homeowners who have negotiated a 5-year fixed-rate loan, the vast majority of homeowners, should not suffer as significant consequences as those with a variable rate loan.

[Ces taux] It’s rather a function of market interest rates, so the interest rates on five-year government bonds, which have already increased a lot, because obviously those are the interest rates that we’re expecting in the coming years to come. The rate hike we expect in the very short term is already included in these rates.He remembers.

Jean Francois in front of the library and the painting.

Jean-Francois Perrault, Senior Vice President and Chief Economist at Scotiabank.

Photo: Radio Canada

Although interest rates will continue to rise, these homeowners can get away with fewer unpleasant surprises. When the Bank of Canada raises its rates, it is not clear that the five-year interest rates will rise muchsays Mr. Perreault.

Access to property becomes more difficult

The astonishing rise in home prices in New Brunswick, as elsewhere in the country, has dampened the hopes of many who wanted to buy a first home. Now, rising mortgage rates will prevent many from becoming homeowners.

Let’s say, the younger one, this might be the worst thing that ever happened. »

Quote from Anne Smith, Estate Agent at Royal LePage Atlantic

Anne Smith, a real estate agent at Royal LePage in Fredericton, notes that young couples tend to lower their expectations of being able to buy a home.

Anne Smith's photo.

Ann Smith, real estate agent at Royal LePage Atlantic.

Photo: Courtesy of Anne Smith

Many would like to take advantage of current interest rates before they go up too much. People […] They don’t want to wait, they really want to buy a house, they’re afraid they won’t be able to buy it at all in a year, in six months, because interest rates keep going upExplains Anne Smith.

For young couples, the coming year will not be easy, according to Jean-Francois Perrault.

Duplex in a residential area.

High mortgage rates make home ownership more difficult.

Photo: Google Street View

Unless there is a big drop in home prices, which we don’t necessarily expect, when interest rates go up, that limits affordability even further.he argues.

The economist explains that the difficulty of accessing the property will have repercussions on the rents that tenants must pay. It is clear that people who are no longer able to buy a house, have to stay in rented accommodation […] Which leads to increased pressure on rents, further restricting affordability.

Do not expect a disaster

In general, Canadians pay off their mortgage loans. Currently, according to CMHCThey do it more than ever.

Also, before granting a mortgage loan, financial institutions calculate the borrowers’ ability to repay in the event of an interest rate increase of 2%.

At this time, Canadians are able to make their mortgage payments and they are able to do so on timepoints out Tara Bowers-Ochoa, from CMHC.

In fact, when problems arise, families tend to pay off their mortgage loans before their other debts.

For example, credit cards, lines of credit, personal loans, auto loans, historically we’d see an increase in delinquency on the side of these other products, before we saw it next to mortgage loansas you say.

This is what we are currently observing, adds Ms. Bourosi Ochoa. We are still at relatively low levels, but it is an indicator that may be a precursor to late payments on the part of the mortgageas you say.

According to Scotiabank’s chief economist, the current economic context remains relatively positive despite everything. When you look at the specific economic data, when you look at the labor market, it’s still very, very, very strong. The increase in interest rates that we are seeing, and that will continue, is taking place in an environment of strong growth, so that somewhat alleviates our concerns.

Practice carefully

While it is impossible to avoid increases in interest rates, it is possible, in some cases, to limit their effects, when it comes to, for example, applying for a new mortgage, or refinancing an existing loan.

The attractive thing now is that short-term interest rates are much lower than long-term interest rates, so people will have a tendency to want to save by taking on a floating rate, or floating rate. However, it is important for these people to realize that these interest rates will rise sharply in the coming months.warns Jean-Francois Perrault, Senior Vice President and Chief Economist at Scotiabank.

For young buyers, real estate agent Ann Smith says she recommends that they prepare for home buying commitments. We’ll explain to them that they have to save more money on deposit, less debt, and pay off their business, visa, and student debt, of all kinds, more quickly.

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