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Mortgage rates to soar higher after latest interest rate increase, but end of hiking cycle in sight

real-estate-vw1207
real-estate-vw1207

The Bank of Canada’s half-point interest rate hike on Wednesday spells further trouble for indebted homeowners and those trying to get into the housing market, who will now have to contend with still higher mortgage rates and borrowing costs.

Following the rate increase, the Royal Bank of Canada was the first of the Big Six banks out of the gate to raise its prime rate from 5.95 per cent to 6.45 per cent. Toronto-Dominion Bank, the Bank of Montreal, Scotiabank, National Bank of Canada, CIBC, Equitable Bank and Laurentian Bank also raised its lending rate to 6.45 per cent on Wednesday afternoon, effective Dec. 8.

Economists, however, highlighted a silver lining that the latest outsized rate increase — which brought the central bank’s trend-setting policy rate to 4.25 per cent — could signal the end of the hiking cycle.

While real estate markets are feeling the effects of rising rates, which now up by 400 basis points this year, none have been hit harder than Toronto and Vancouver. Toronto home prices slipped again in November by just over seven per cent to roughly $1.08 million as the number of homes exchanging hands fell 49 per cent year over year. Vancouver fared no better, with November sales tumbling more than 50 per cent and the benchmark price of a home dropping from October.

While sales and prices are slipping, homes are not getting any more affordable for would-be buyers.

Victor Tran, mortgage and real estate expert at Ratesdotca, said this latest move by the central bank would likely push the prime lending rate offered by the big banks to 6.45 per cent. Tran also said that for every 50-basis point hike, a homeowner with a variable-rate mortgage can expect to pay roughly $28 more a month per $100,000 in mortgage amount.

We may be seeing the bottom of the housing market trough before buyers begin to enter the market in spring of 2023

Victor Tran

“Previous rate hikes cooled the housing market significantly while rising rates pushed many homebuyers, including first-time homebuyers and investors, to the sidelines to wait out the instability in the market,” Tran said, adding that Wednesday’s hike will do the same. “We may be seeing the bottom of the housing market trough before buyers begin to enter the market in spring of 2023.”

The Bank of Canada is already seeing the rising rate environment’s impact on mortgage holders. The central bank’s recent data showed that about 50 per cent of variable-rate, fixed-payment mortgages and nearly 13 per cent of the entire Canadian mortgage pool have already hit their “trigger rates,” or the point where monthly mortgage payments are only covering interest and not making headway on the principal.

There is some good news for house hunters. Clay Jarvis, mortgage and real estate expert at personal finance website NerdWallet Canada, said that while the path to homeownership might have grown a little steeper after this announcement, it shouldn’t be a deal-breaker.

“The good news for homebuyers is that the Bank of Canada may be nearing the end of its rate increases,” Jarvis said. “The overnight rate could rise further in January and March, but if the bank truly believes that inflation will be back down around three per cent by late 2023, they must also believe that the hikes they’ve been making will start having a noticeable effect in the early to middle stages of next year. Once inflation starts reversing, rate hikes should stop.”

The Royal Bank of Canada’s economics team also noted that the Bank of Canada’s policy statement accompanying the rate hike wasn’t as hawkish as the increase itself.

“Rather than suggesting ‘the policy interest rate will need to rise further,’ today’s guidance is that ‘Governing Council will be considering whether the policy interest rate needs to rise further,’” RBC Economics senior economist Josh Nye wrote. “That clearly opens the door to a pause as soon as the next meeting in January, and in our view frames that decision as between zero and 25 (basis points).”

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