Canadians looking to buy a home can expect mortgage rates to soon be on the rise, experts say.
The Bank of Canada鈥檚 is a good indication of why, said Don Drummond, economist at Queen鈥檚 University and former chief economist for TD Bank. The Bank of Canada announced Wednesday that while its current policy rate remains steady at 0.25 per cent, it will likely increase as early as the second quarter of next year.
According to Drummond, mortgage rates are bound to follow suit, particularly variable ones.
鈥淭he variable rates will go up quite quickly, they could even go up in anticipation of the bank action,鈥 Drummond told CTVNews.ca in a phone interview on Thursday.
He predicts the Bank of Canada鈥檚 short-term interest rate will increase by about 0.75 percentage points by the end of 2022. Eventually, he anticipates the rate will be anywhere between 1.75 and 3 per cent by the end of 2023, which he describes as a more 鈥渘ormal鈥 rate. He expects variable mortgage rates to move up in lockstep.
鈥淭he variable rate is keyed off the chartered banks鈥 prime rate, and the prime rate is keyed off the Bank of Canada鈥檚 policy rate, so the variable rate would move up to the same degree,鈥 he explained.
Robert Hogue, a senior economist with the Royal Bank of Canada, predicts an increase of closer to 0.5 percentage points in the central bank鈥檚 interest rate by the end of next year, but sees a rise in variable mortgage rates nonetheless as a result.
Fixed-rate mortgages are more of a wild card, as they aren鈥檛 impacted by the Bank of Canada鈥檚 actions in the same way. Still, there are signs of these fixed mortgage rates starting to increase as well.
鈥淔ixed rates have already started to move higher, we鈥檝e seen this over the past several months,鈥 Hogue said in a telephone interview with CTVNews.ca on Thursday.
Fixed-rate mortgages are linked to bond yields, Hogue explained, which involve longer-term interest rates, and bond markets will anticipate future moves by central banks. He forecasts that the average rate of a five-year government of Canada bond yield will likely increase by 0.5 percentage points as well by the end of 2022.
鈥淲e do expect that the overnight rate will rise, and at the same time, we do expect that bond yields will continue to creep higher throughout the year,鈥 he said. 鈥淚n both cases [fixed and variable rates], these will have upward implications on mortgage rates.鈥
While these increases may be concerning to some homebuyers, Drummond says they鈥檙e necessary.
鈥淲e should want [interest rates] to go up,鈥 he said. 鈥淭his is causing a lot of imbalances, it鈥檚 putting the entire world in massive quantities of debt and that's going to come back to hound us if we don't put an end to that.
鈥淯nfortunately, people won't see that because they've lived through the lowest rates in history.鈥
Drummond points to a reality currently faced by many homebuyers, including his own daughter 鈥 bidding wars due to low supply in available houses on the market. While moving from Saskatoon to Aylmer, Que., his daughter was up against 15 bidders at one point for one property. His fear, he says, is that houses are being bought for well above what their market value will be in six to 12 months. While house prices still haven鈥檛 come down by much, Drummond does note some improvements.
鈥淭here are still some bidding wars going on, but they're much more isolated than they were over the summer months,鈥 he noted.
Hogue says that mortgage rates have fallen to historic lows, creating a red-hot housing market. Rising mortgage rates will help cool things down.
鈥淲e think the housing market that has already cooled from incredibly strong levels at the start of this year, will continue to cool over time through the remainder of this year and into next year,鈥 Hogue said.
His advice to new homebuyers facing these increases: start by speaking to a specialist.
鈥淓veryone's situation is different,鈥 Hogue said. 鈥淓veryone needs to make a well-educated decision whether to pick up a loan, become a homeowner or continue to rent.鈥
Drummond鈥檚 advice is slightly more cautionary.
鈥淭ry to keep the principal as low as you can...pay down that principal to lower your exposure,鈥 he said.
When deciding whether to go fixed or variable, Drummond says that historically, those who go variable have ended up paying less interest over the course of their term. But it really comes down to risk appetite, he says.
鈥淚f you're the cool and calculated person who plays the tables of Las Vegas with some success and don't have a heart attack in the process, stay with a variable rate, but if you鈥檙e the kind of person that gets the craps table鈥on't do it.鈥
Finally, anticipate that rates are going to go up.
鈥淭here's a generation of young people who are hooked on super low mortgage rates and they have come to believe that that is a norm. But that is not the norm.鈥
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