While all eyes have been on the Bank of Canada's (BoC) impending hiking cycle, and the impact on the variable cost of borrowing, homebuyers are already being hit by considerably higher mortgage rates on the fixed side.

Fixed rates, the pricing of which is determined by government bond yields, have skyrocketed, as investors have been selling with vigour prior to the next BoC announcement -- and that's starting to make mortgage qualification all the more onerous.

READ: New Forecast Calls for Three 0.5% Rate Hikes This Year

It's also substantially widened the spread between fixed and variable rate offerings. For example, on an insured mortgage, today's five-year fixed rates range from 3.69-3.89%, while the variable rate is 1.50-1.70%; a five-year fixed rate conventional mortgage is 3.74-3.94%, and the variable rate is 1.80-2%. In today's red-hot housing market, that means far fewer buyers can afford to lock in.

According to Sean Cooper, a mortgage broker and author of Burn Your Mortgage, depending on the lender, fixed rates are in excess of 4%. And, they're set to rise higher as the central bank hikes to tame inflation; in addition to the war in Ukraine, which has caused oil and gas prices to billow, COVID-19 supply chain bottle necks have pushed prices up for nearly everything, adding to the brunt already felt by overextended homebuyers.

Cooper says homebuyers who managed to get rate holds earlier this year -- which gives them three to six months to buy a home -- are insulated from the current rate environment, but buyers just beginning their searches aren’t.

"Scotiabank is an example where their rates are above 4% in some categories. I was quite surprised because I haven’t seen rates like this in about four years,” Cooper said. “My clients are surprised to see some of these fixed rates because, in terms of how quickly rates are going up, in a two-week period we saw some fixed rates go up 1%. It’s crazy how fast they are going up like this. Fixed rates are skyrocketing. People who have rate holds are definitely thankful because if they were to take a mortgage today, the rate would be a lot higher than if they secured a rate hold in the last 120 days.”

Indeed, in the flat interest rate environment of the last few years, rate holds weren’t imperative like they are today, and for buyers adamant about locking in a five-year fixed rate, there’s no time like the present to secure a rate hold.

Another factor to consider is Guideline B-20, which stress tests mortgages at 5.25% or the contract rate plus 2% -- whichever is greater. Combined with today's higher fixed-rate mortgage rates, that can diminish homebuyers’ purchasing power by as much as 5-8%, Cooper says.

“If you’re buying in a big city, you need every dollar of purchasing power you can get and that’s pushing people even more towards variable rates, I find. Fixed rates are double the variable rate right now, so you qualify for slightly more with the variable rate option,” he said.

Higher Fixed Rates are Already Having an Effect on the Market

A rising interest rate environment will invariably soften sales activity in Canada’s housing market, particularly its two most expensive markets in Toronto and Vancouver, which will lead to balanced conditions.

Bradley Watson, host of Toronto’s #1 Real Estate Podcast and a broker with Sutton Group – Summit Realty Inc., has noticed it’s underway. As rates rise and buyers become circumspect about purchasing new homes, sales activity is slowing down and allowing cooler heads to prevail. Moreover, that it is occurring during the spring market, the busiest time of the year in real estate, bespeaks something larger at play, Watson believes.

“I think that this is a trend that is going to continue. From a real estate perspective, it’s wonderful. I’m very excited to be in this market because I’m getting calls from both the buying and selling sides,” he said. “I’ve been looking at it as who’s going to flinch first, the buyer or seller, but the problem here has been that a lot of sellers have been reluctant to sell because they have had nowhere to go, so as soon as you make it an impossible task for buyers, shut off the tap of listings and causes prices to reach new highs, but now we’re beginning to see more availability of listings and that means homes are being priced in line with their expected sale prices rather than them being listed too low to start bidding wars.”

Watson recounts one of his clients being stuck in a Toronto condo because of scant single-family listings, but that’s now changing and listings spend more time on the market, affording his client numerous options and impelling him to resume his search.

According to the latest data from the Toronto Regional Real Estate Board, the average sale price of a Toronto home on the MLS declined by 1% month-over-month in March to $1,286,136, which Watson believes is an incipient trend. Moreover, because condos have appreciated at a far slower pace than detached homes, countless move-up buyers haven’t been able to climb the housing ladder, but should this nascent trend hold, that will change.

“As soon as people realize value has come down, they look at it as a trade-off, but if I take a 10% haircut on a sale but get a 10% deal on a purchase, that could be a good deal for me and it creates a balanced market,” Watson said. “For people who are move-up buyers, they will benefit the most because we’re starting to see these larger detached homes being the hardest hit, price-wise.”