The Bank of Canada is expected to raise rates again tomorrow, but whether the hike is 50 basis points or 25 is a close call, economists admit.
What is certain is that even the smaller hike will bring the rate to the highest it’s been since 2008.
Canada’s central bank has hiked its key rate six times since March from 0.25 per cent to 3.75 per cent, one of the most aggressive tightening cycles in recent memory.
So how are Canadian borrowers faring?
Bank of Canada senior deputy governor Carolyn Rogers recently flagged that rising rates would be painful for some homeowners with variable-rate mortgages, which Bank research indicates now represent about a third of total outstanding mortgage debt, up from about one-fifth at the end of 2019.
About half of variable-rate mortgages on fixed-payment — about 13 per cent of all mortgages — have now reached their trigger rate, the point where additional payments may be needed, the Bank estimates.
Variable rates are set at prime minus a discount. If the Bank raises its rate by 50 bps tomorrow, prime rates are expected to rise to 6.45 per cent and variable rates will be set at about 5.7 per cent and above.
“The upcoming rate hike will mean even more Canadians will reach their trigger rate and trigger point,” said James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender.
Ratehub sheds light on what the full year of rate hikes has meant to borrowers by calculating the payments of a homeowner who took out a $694,487 mortgage on a five-year variable rate of 0.90 per cent at the beginning of 2022.
If the Bank hikes by 25 bps the homeowner will be paying $1,317 more a month or $15,804 more a year, a 51 per cent increase, than before the rate hikes started.
If the Bank hikes by 50 bps, the homeowner would be paying $1,415 more a month or $16,980 more a year, a 55 per cent increase.
Rising interest rates have significantly cooled the housing market and for the first time mortgage origination has dropped below pre-pandemic levels, says Equifax Canada’s third-quarter consumer credit report out this morning. The biggest drops were in Ontario and B.C. where new mortgages fell 23.6 per cent and 19.7 per cent respectively, from the third quarter of 2019.
Those who did buy saw much higher payments than if they had bought the year before. Equifax said first-time home buyers are now paying over $500 more in monthly payments for almost the same loan amount as first-time home buyers in the third quarter of 2021, a 31.4 per cent increase.
“Higher interest rates not only impact consumers opening a new mortgage, but can also impact those reaching the end of agreed mortgage term periods who are looking to renew or refinance,” said Rebecca Oakes, vice-president of Advanced Analytics at Equifax Canada.
Oakes said more than 1.2 million mortgages in Canada are now three to five years old and 37 per cent of them carry a balance of more than $250,000.
“If these consumers do have to renew their mortgage over the next 12 to 18 months, they may experience significantly higher payments than they currently have,” she said.
Rising debt and the ability of Canadians to handle it will certainly be on the central bank’s radar. Total consumer debt is now $2.36 trillion, a 7.3 per cent increase from the third quarter last year, said Equifax.
And non-mortgage debt is on the rise again, surpassing pre-pandemic levels to hit $599.9 billion.
“Part of the new credit uptake we’re seeing is likely from people who are feeling financial stress from sustained increased living costs and are taking on more debt as a result,” said Oakes.
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Uh oh, a key part of Canada’s yield curve is now at the steepest inversion since the early 1990s — and you know what that means. An inverted yield curve is often seen as a warning sign of recession as investors move their money to longer-duration debt because of concerns about the near-term.
The yield on two-year debt reached 100 basis points above 10-year bonds on Monday — the largest gap since the early 1990s, when the country’s economy was just plunging into a deep recession.
Canada is not alone. Short-term yields are pushing higher around the world as markets price in further rate hikes from central banks, reports Bloomberg. Two-year Treasuries yield about 78 basis points more than 10-years.
Prime Minister Justin Trudeau will deliver remarks in Montreal at the opening ceremony of the 15th meeting of the Conference of the Parties to the United Nations Convention on Biological Diversity about the importance of protecting nature and biodiversity
Trudeau will participate in a roundtable discussion with the Federation of Canadian Municipalities’ Big City Mayors’ Caucus in Ottawa and deliver opening remarks
Toronto Regional Real Estate Board releases November home sales figures
Today’s Data: Canada merchandise trade balance, Ivey PMI, U.S. Goods & Services Trade Balance, U.S. Global Supply Chain Pressure Index
Earnings: Evertz Technologies, Casey’s General Stores, Toll Brothers, Dave & Buster’s Entertainment, Smith & Wesson Brands
Most Canadians associate the month of April with taxes, but it’s actually the month of December that should get all the attention, writes tax expert Jamie Golombek for the Financial Post. Golombek explains how if you are strategic in the timing and amounts of your RESP withdrawals, you may be able to get all the funds out of the plan tax free. Learn more here
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