With the next Bank of Canada (BoC) rate announcement scheduled for tomorrow, June 7, borrowers, already carrying the burden of significantly higher mortgage payments, are anxiously bracing for the possibility of yet another hike.
Canada's inflation may have seen an unfortunate uptick in April, but GDP growth in the first quarter outpaced forecasts, coming in at 3.1%. This has left the likelihood of a rate hike in a fairly ambiguous state -- a recent report from Desjardins called it "almost a coin flip at this point." But economists have been clear about one thing: a hike is very much on the table, and if not in June, then likely in July.
If a hike does happen, the general consensus is that it would be a more mild 25-basis-point increase, bringing the national bank's policy rate to 4.75%. But with nearly half of Canadian mortgage holders already finding their monthly housing payments tough to manage, the increase would go far from unnoticed.
Toronto-based Mortgage Broker Ron Butler says that borrowers with fluctuating variable-rate payments or with large home equity line of credit balances will feel the most pain.
"These people feel this stuff instantly," Butler said. "The next payment, it could be in two weeks it goes up. They feel it right in their pocketbook every single time."
As for just how much more they'll be paying, Butler points to the general rule of thumb when it comes to variable rate mortgages: an extra $20 per month for every $100K on a mortgage. On an $800K mortgage, that translates to another $160 per month at a time when most Canadians are already feeling cash-strapped.
"They were all stress tested at 5.25%, by the way," Butler said. "It's exceeded the stress test, so people are feeling stressed. There's no point trying to pretend they're not."
In the wake of growing unaffordability, banks have seemingly become more flexible with their clients, looking for new ways to keep buyers in their homes (and making mortgage payments). Both TD and CIBC are allowing variable-rate lenders who hit their trigger rate -- the point at which a borrower's payments no longer cover all of the interest -- to add the outstanding unpaid interest to the original loan amount. This is in line with Canada Mortgage and Housing Corporation regulations, which allow mortgages to grow up to 105% of the original loan amount.
What Butler's seen recently, though, is "virtually every single bank offering a reset to 30-year amortization." In one instance, he saw a mortgage that was down to 14 years reset at a 30-year amortization after the borrower called the bank saying he can't handle the increased payments. The change dropped the borrower's payments by roughly $750 a month.
"That's the bank suggesting it, that's not the customer begging for it," Butler said.
If a rate hike does come tomorrow, Butler notes that those looking for fixed-rate mortgages may not notice much of a rate difference, if any at all.
"For fixed rate mortgages, the bond market has already priced in at some point, in either this meeting, the July meeting, or the September meeting, that it will go up by 25 bps," Butler said. "So even if the bank just went ahead and raised tomorrow, it would have only minimal impact on fixed rates."
It comes as no surprised that fixed-rate mortgages, specifically short term loans of two or three years, are what Butler's recommending to clients, as he has done for the past year.
"The cuts may be far away, they may be the middle of next year -- they may not if there's a big recession by October," Butler said. "We're all talking about a chance the rate will go up, so that would be a terrible bet to take a variable."