Expected for several weeks, the 0.5% increase in the key rate confirmed by the Bank of Canada on Wednesday was already reflected in the mortgage loan market.
Posted at 6:00 a.m.
This increase marks the end of an exceptional episode of very low interest rates which had been decided by the central banks to support the recovery of the economy after the shock of the pandemic.
After falling below 2% at the start of 2021, the average interest rate for five-year fixed-rate and term mortgage loans is now returning to its level of around 3.8% which was current in beginning of 2019.
In the variable-rate mortgage loan market, the rise in interest rates remains less pronounced. Since the beginning of the year, the average floating rate has risen from 1.5% to 2% these days. But it remains well below its average level of 3.5% during 2018 and 2019.
“Borrowers who have variable rate mortgages and home equity lines of credit against their property value will feel an immediate impact. They can expect their lenders to increase their prime rates by 50 basis points (0.5%) in the coming days,” warns Philippe Simard, director of the mortgage sector in Quebec at Ratehub.ca.
“The Bank of Canada has indicated that further rate hikes are to be expected. Therefore, variable rate borrowers should also expect further rate increases throughout the year. As for fixed-rate mortgage borrowers, they will not be affected by this increase in the key rate before the maturity of their loan. However, they will need to plan for higher mortgage payments when they renew their loan. »
Towards fixed rates at 4%?
According to mortgage market experts consulted by The Press, if the Bank of Canada confirms a second rate hike of 0.5% as anticipated in June, the average interest rate on five-year fixed-rate and term loans could cross the 4% threshold in over the next few weeks. If this scenario is true, it would be the highest interest rate in more than 10 years for this type of mortgage loan.
In the case of variable rate mortgages, also with five-year terms, a second increase of 0.5% in the Bank of Canada’s key rate could push the average variable rate to around 2.5% by June . This would be an increase of one percentage point – from 1.5% to 2.5% – over a six-month period, equivalent to at least a 60% increase in the costs of interest in payments on a variable rate loan.
Should we apprehend the risk of a budgetary shock among variable rate borrowers? Not for the moment, according to John Fucale, senior vice-president at the brokerage firm Multi-Prêts Hypothèques.
“Since the introduction in 2016 of a regulatory qualification rate of at least 5.25%, or 2% more than the contracted rate, mortgage borrowers in Canada are already warned of the impact of an increase rates on their budget. Especially those who have a variable rate loan, ”underlines John Fucale.
Barring a significant deterioration in their fiscal position, variable rate borrowers should continue to enjoy lower interest costs relative to fixed rate loans.
“For most mortgage borrowers, the most important thing in managing their personal finances is minimizing interest costs over the life of their loan,” says John Fucale. Hence the importance of being well advised to choose the mortgage financing product that is best suited to each situation. »