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The increase shakes heavily indebted consumers who took out large mortgages during the pandemic
Author of the article:
Reuters
Julie Gordon and Divya Rajagopal
Date of publication:
July 15, 2022 • 13 hours ago • 3 minutes of reading • 19 comments Rising interest rates have forced mortgage rates into exile. Photo by Mark Blinch / Reuters files
Content of the article
OTTAWA – Surprising rise in Bank of Canada interest rates this week has shaken heavily indebted consumers, who took out large mortgages during the pandemic but were less prepared for the sharp rise in lending costs than Bay Street investors .
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Higher rates are also holding back Canada’s previously hot real estate market, and as consumers feel the pinch, they could curb spending on travel, dinners and luxury items.
The central bank raised its policy rate by 100 basis points to 2.5% on Wednesday, its biggest increase in nearly 24 years. Its goal is to crush hot inflation, which reached a four-decade high of 7.7% in May, with the bank’s promise of more hikes.
Money markets are betting on three more increases this year to bring the policy rate to between 3.5% and 3.75% by the end of the year.
“There will be a lot of pain out there. And I think the bank is underestimating the risks to both housing and consumption,” said Stephen Brown, senior economist at Capital Economics Canada.
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There will be a lot of pain out there
Stephen Brown, economist, Capital Economics
The moves have caused mortgage rates to spiral up, a concern for Canadians with variable-rate mortgages, which accounted for about 50 per cent of new mortgage lending in Canada in May, compared with 7 per cent before the pandemic, official data show.
“I am distressed,” said Udit Kumar, who bought a house on the outskirts of Toronto this spring. The rate on your variable mortgage has already risen from 1.84% to 3.4% in just a few months.
“We are now in a situation where the value of our homes could be declining and mortgages are rising,” he said.
We are now in a situation where the value of our homes could be going down and mortgages are going up
Udit Kumar, owner
Most Canadians with variable mortgages have static payments: as rates go up, the monthly fee stays the same, but you pay less. But about 20 percent of variable loans are not static, meaning each raise can add hundreds of dollars to a down payment.
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For example, a monthly payment of $ 2,845 (US $ 2,171) in a typical home will increase by $ 323 due to the jumbo rise, according to Lowestrates.ca.
Toronto area mortgage broker Ron Butler said he was already listening to people worried about having to sacrifice groceries to pay off their mortgages. But while the situation is painful for many, it does not anticipate a wave of defaults due to Canada’s record low unemployment rate, he said.
“In the history of banking in this country … rate hikes have not had a massive impact on mortgage delinquency. No matter how fast and how big it is.”
Still, with social media full of people lamenting their suddenly large payments and collapsed home values, realtors say Wednesday’s 100bp rise has caused another cooling on the real estate market that already cools in Canada.
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“Everyone freezes when this happens,” said Dan Plowman, owner of a real estate agency in Durham, a suburban area east of Toronto.
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Which means the Bank of Canada’s total percentage point increase for the real estate market and your mortgage
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Exclusive: Tiff Macklem on the Bank of Canada’s surprise rate hike, fighting inflation and its error forecast
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The Bank of Canada opts for an increase in shock to prevent inflation
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What economists are saying about the Bank of Canada’s sharp rise in interest rates
The average selling price in the Toronto area fell 14.1 percent in June from the peak in February, reversing some of the region’s strong pandemic gains.
Brown, of Capital Economics, expects house prices across the country to fall about a 20 percent high to a minimum and worries that the Bank of Canada may be too fast to sacrifice the housing market to cool inflation.
But a chill may be what the Bank of Canada is looking for. Senior MP Carolyn Rogers reiterated on Wednesday that restoring balance in the Canadian real estate market would help curb the excess demand that fuels inflation.
“And that’s what we want to do,” he said.
© Thomson Reuters 2022
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