Bank of Canada hike: Have borrowers' views on the market changed?

A number of factors are set to weigh on affordability in the mortgage market in the near future

Bank of Canada hike: Have borrowers' views on the market changed?

After months of speculation, the inevitable finally arrived at the beginning of March: the Bank of Canada announced the first hike to its benchmark policy rate of the COVID-19 pandemic era, bringing an end to nearly two years of rock-bottom low rates.

The move was the first of several anticipated rate increases for 2022, with the Canadian Real Estate Association (CREA) noting in its updated Resale Housing Market Forecast that those hikes were likely to play a significant role in impacting the country’s housing market this year and next.

The association said that nine Bank of Canada rate increases of 0.25% each appear plausible, if not likely, by the end of 2023, a trajectory that could have a potentially transformative impact on Canadians’ attitudes toward the housing market.

For now, though, the Bank’s opening hike of its 2022-23 cycle doesn’t appear to have caused much alarm among mortgage shoppers or prospective homebuyers.

Cyrus Habibi (pictured top), an associate mortgage broker with Premiere Mortgage Centre in Halifax, Nova Scotia, said that there had been little shift in clients’ views since the news of the Bank hike broke a matter of weeks ago.

“With our clients, we’re not seeing much of a change in attitudes following the Bank of Canada statement,” he told Canadian Mortgage Professional. “On fixed vs. variable, the clients that would have gone for variable are still going for that option, and likewise for fixed.”

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With variable-rate mortgages typically tied to the Bank’s policy rate, those options have witnessed a surge in popularity as that central bank trendsetting rate plunged during the pandemic.

Discounted five-year mortgage rates were already on the rise in 2021, but with the benchmark rate now also crawling upward, the future of the fixed-vs-variable debate will be an intriguing one to follow.

Still, Habibi said that the spread between variable and fixed remained so wide that the Bank hike had done virtually nothing to change clients’ preferences on the matter.

“If someone is concerned about the possibility of rate hikes and the impact that they’ll have, then they were probably never going to go for variable anyway – it wouldn’t be the right option for them,” he said. “It just depends on the individual preferences of the client.”

Shirl Funk, a Winnipeg-based broker with The Mortgage Centre, said that she had seen some customers enquire about making a change in light of the Bank’s announcement, although she also noted that the hike was unlikely to precipitate any kind of cooling-off in the market.

“[Some of] the customers that are variable right now are starting to call me and say, ‘How do I lock my rate?’” she said. “I’ve had a few calls on that already. I don’t think it’s going to change and it’s not going to slow down. Everybody’s just buying houses.”

The impact of projected rate hikes this year and next could be most keenly felt among Canadians who already have a mortgage. An Angus Reid poll earlier in March indicated that 58% of mortgage holders in Canada view their payments as disproportionate to their incomes.

Read next: Another Bank of Canada rate hike likely in April: BMO economist

The firm described inflation, which recently topped a 30-year high in Canada, as the “spectre” that pervades almost every economic conversation across the country, with interest rate increases one of the Bank’s main ways of ensuring that phenomenon doesn’t spiral out of control.

“The Bank is expected to continue to raise rates this year to fight inflation,” Angus Reid said, “and the impact could be significant on those with variable rate mortgages and those whose fixed rate mortgages come up for renewal soon.”

RBC Economics has also recently sounded something of an economic alarm for Canadians, warning that ballooning inflation and the escalating crisis in Ukraine were likely to have a sizeable negative impact on the household savings amassed throughout the pandemic.

“As the surge in [consumer] prices boosts revenue for producers of… commodities – including in the Canadian oil and gas and agricultural sectors – it will also eat into the stockpile of household savings built up during the pandemic,” the banking giant said in a report.

Skyrocketing oil prices in recent weeks would add $600 per household, or $10 billion per year, to the cost of gasoline compared with several weeks ago, it added.