It’s getting more expensive than ever to carry a mortgage.

Borrowers are having to come to terms with a new interest rate reality, as both fixed and variable rates have been steadily rising -- and new heights are on the horizon. Today, the Bank of Canada implemented a half-percentage increase to its trend-setting Overnight Lending Rate, which consumer lenders use to set their own Prime-based prices. It was the largest one-time increase seen since May 2000, as the central bank ramps up its efforts to tackle skyrocketing inflation.

Meanwhile, fixed mortgage rates have risen along with soaring bond yields, resulting in posted five-year big bank rates in the 4% range -- a level not seen in a number of years.

The combination of these rising rates and aforementioned inflation -- which, at a growth pace of 5.7%, is at a 31-year high -- means consumers must grapple with the double vice of higher borrowing costs and cost of living. And those coming up to renew their mortgage are the likeliest to feel the brunt.

“The key piece for me is not just the purchasers, but those that are coming up for renewal. They may be coming in at a much higher rate than they perhaps have locked into before,” says Allison VanRooijen, VP of Consumer Credit at Meridian

“Those that are in variable rate products now may feel a slight increase -- on a $450,000 variable-rate mortgage, that’s going to be a hundred a month right now. But again, it’s on top of gas, groceries, all those pressure points on your monthly budget; it’s not any one factor, but it’s adding up and consumers will start to feel a bit of pressure on their monthly cash flow.”

READ: Is This Week's Interest Rate Hike a Big Deal? No, But Steady Increases Could Be

For those looking to enter the upcoming spring market within the next few months, she adds, having secured a rate hold or preapproval will be imperative, especially as today’s supersized hike won’t be the last.

According to pricing models in the overnight lending market, it’s anticipated there will be at least another three half-point increases to come in 2022, before the Bank of Canada resumes a more typical cadence of quarter-point increases before achieving its “neutral” rate in the 2.5%-3% range. 

That means borrowers and lenders will need to get a bit more creative to ensure they can still qualify, says VanRooijen, with new products emerging to better address borrowers’ challenged financial pictures.

“I think the positive thing is the mortgage industry hasn’t sat still for the last five years,” she says. “There’s been an acknowledgement that homeownership and price escalation has been a challenge and so there’s been a lot of great innovation in the space in terms of customized mortgage products to support buyers and if you’re new to the market or maybe haven’t spoken to a broker or a credit union, or other alternative lenders that are out there in the past two years, there are options that didn’t exist, even four or five years ago. So, between the federal government programs, co-ownership, and these new programs, there are programs available that can help address that gap as we enter this changing mortgage market.”

Rising Rates Could Stifle Lender Competition

However, she cautions, another emerging trend as a result of an overall higher rate environment could be lack of choice among mortgage consumers. As mortgage rates steadily rise, so too will the five-year rate -- an average of the five-year fixed posted rates from the big banks -- which is used as the threshold for the B-20 mortgage stress test.

Currently, borrowers must prove they can afford a mortgage at this elevated rate, which is either 5.25% or their contract rate plus 2% -- whichever is higher -- and as the threshold rises, that whittles their purchasing power. Generally, only borrowers who stay with their lender upon renewal are spared undergoing the stress test -- and so there may be a lot less rate comparison occurring in the marketplace, says VanRooijen.

“[This] will limit borrowers from perhaps rate shopping and requalifying versus staying with their lender. That’s an area I’ll be keeping a close eye on to see if that shifts behaviour for homeowners as their mortgages come up for renewal.”

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