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Canada’s new mortgage reality

Fin - Balance Sheet - CA
Canada’s new mortgage reality

The days of rock-bottom mortgage rates are done.

In a few years, Canadians will sit around the dinner table and reminisce about the “good ol’ days” when they could get a mortgage for about 2 per cent.

For those old enough to have paid the 20-per-cent rates in the early 1980s, it will be a story of how much money they saved, especially in the 2010-13 period. For everyone else, it will be a tale of how much more expensive it has become to own a home.

“This is the end of an era,” Benjamin Tal, deputy chief economist at CIBC World Markets says of the recent rise in interest rates.

Canada’s big banks have increased the cost of fixed-rate mortgage by more than a third in the past few months, announcing this week that they’ve risen again to just below 4 per cent for a five-year term.

Blame the U.S. for the rising rates. It’s the rise in the benchmark 10-year U.S. Treasury yield, which hit its highest point since 2011 this week, which is helping to drive rates higher, including in Canada.

However, it’s for a good reason – because the U.S. economy is starting to recover. That, in turn, is actually helpful for Canada’s economy overall given our strong ties to our neighbours to the south, economists note.

Still, it’s hard to look at rising rates as a good news story if you have a mortgage, especially in cities such as Vancouver and Toronto where housing costs are highest.

TD Bank estimates its new mortgage rate of 3.8 per cent for the special 5-year fixed term will translate into a $130 rise in monthly mortgage payments since May for the average Canadian home owner with 25-per-cent down over a 25-year amortization period.

While that makes owning a home less affordable, TD economists Derek Burleton and Diana Petramala note that affordability “is still likely to remain decent from a historical perspective.”

What’s more, the anticipated growth in personal incomes of about 3-to-4 per cent over the next couple of years will help offset the higher rates, the economists say. Not to mention, the correlation between higher interest rates and home price declines should serve to make a rising-rate environment more palpable for homeowners.

Many economists also predict interest rates will rise gradually over the next few years, giving homeowners time to adjust.

Meantime, rising rates are expected to have a negative impact on Canada’s already volatile housing market.

While rising rates are expected to spur potential buyers to get off the fence and buy a place, the aftermath is anticipated to be a drop in sales.

“As rate hikes are implemented, home sales tend to fall over the next few months that follow,” TD said in a note on Friday.

It estimates that for every 1 percentage point increase in interest rates there is an instant increase in sales of 6 percentage points as buyers rush to take advantage of lower rates, followed by a 7-per-cent decline in the months that follow.

“Hence, the net impact is a 1 percentage point permanent decline in existing home sales due to every 1 percentage point increase in interest rates,” the bank says.