The resilience of the Canadian consumer, thanks to built-up pandemic savings, has been one factor preventing the economy from falling into recession. But as more households face increasingly higher mortgage costs, they will have less to spend on other things that would keep supporting the economy.
Another reason for the resilience is that households piled into variable-rate mortgages with their lower starter rates during the pandemic, but Tony Stillo, director of Canada Economics at Oxford Economics, says they’ll be facing higher payments at some point, along with those who are renewing fixed-rate mortgages.
“We’ve been calling for a recession, and the resilience [of consumers] of the first half of this year surprised us,” he said in an Aug. 29 interview.
“Canadians tend to pay their mortgages because we are full recourse up here,” Mr. Stillo said, regarding a key difference with the United States. A mortgage is a full recourse loan in Canada, which is not always the case in the United States, and thus the lender has the right to pursue the borrower if they become delinquent.
Mortgage rates climbed in August on the back of a significant sell-off in bond markets. As bond prices plunged, yields rose and Canada’s 5-year bond yield hit a 16-year high of 4.15 percent on Aug. 16.
Mortgage strategist Robert McLister told The Epoch Times on Aug. 29 that the average fixed-rate mortgage has gone up about 0.10 to 0.20 percentage points in August, but variable-rate mortgages haven’t changed their rates.
Thus, fixed mortgage rates can move higher without further rate hikes from the Bank of Canada.
Some 5-year fixed mortgage rates are now higher than 6 percent, and the best rates available, according to online mortgage site ratehub.ca, are in the mid-5 percent range.
“Fortunately for new borrowers, government yields have fallen back down to where they began the month. That takes some pressure off lenders to hike further,” McLister said.
But he warns that the release of critical economic data in both Canada and the United States in the next couple of weeks “could change that on a dime.”
The Canadian 5-year bond yield had fallen back to around 3.9 percent on Aug. 30.
Mortgage interest costs are the fastest rising component in headline inflation, at a rate of over 30 percent per year. ‘’
Mortgage Advice
With mortgage rates as high as they are, Canadians are looking for any kind of reprieve.
Andy Hill, a licensed mortgage broker and co-founder of ratefilter.ca, says Canadians need to understand the product they are getting into and not just fixate on a low rate when shopping online.
For example, Mr. Hill says Canadians who opted for a variable-rate mortgage during the pandemic, when the rate was as low as 0.85 percent, are now looking at a 5 percent rate—when they could have locked in at 1.49 percent for five years.
Mr. Hill also points out that the majority of mortgage brokers can only do a certain amount of business at any one lender.
“So a lot of brokers represent that they offer the entire market. The majority of the time those brokers deal with one to three lenders,” he said in an Aug. 28 interview.
Mr. Hill advises Canadians to shop around and see what rates are applicable given their situations, and that it is a good time to take a product that might have a little less flexibility in order to get a discount on the mortgage rate.
“I think that there’s very little case to lock in a five-year fixed at these crazy rates. I think you want to shorten your duration in terms of a mortgage length and then see where things go,” he said.
Mr. McLister says that in the months leading up to the first Bank of Canada rate hike in March 2022, far too many mortgage advisers were recommending variable-rate mortgages.
“They were ignoring the business cycle, inflation, client finances, forward rates, and the math on risk/reward. What they were selling was an ultra-low starting rate and a misguided view that variables usually win,” he said.
Mr. McLister adds that many mortgage providers advertise low rates that only apply to specific borrowers, but they don’t disclose that caveat.
He started Canada’s first flat-fee mortgage consulting business https://fixedorvariable.ca/, which helps people find the most suitable rates and products from all mainstream lenders without accepting compensation from lenders.
Impact Coming
In July, the Bank of Canada said households are, on average, in better shape financially than some reports would suggest. But, the central bank added, the “full effect of rate increases has yet to be felt by some borrowers” and that only about a third of mortgage holders have been directly affected by higher rates.
Mortgage Professionals of Canada on July 10 cited the BoC in noting that over a million Canadians will have mortgages renewing in 2023. The industry group added that homeowners will likely have less options to switch lenders when coming up for renewal.
“We think the full impact of higher interest rates are likely to be hitting in the second half of this year. We still expect the downturn in the economy to be a moderate one, and not as deep as what you typically see in past recessions,” Mr. Stillo said.
Mr. Stillo is expecting the Bank of Canada to leave rates unchanged on Sept. 6.
Mr. McLister notes that financial markets are pricing in a slight increase in rates for fixed-rate mortgages before year-end, in advance of a steady decline in 2024.
