Is Canada's borrowing landscape set for dramatic change?

Both fixed and variable mortgage rates look destined to continue a steady upward climb in the coming months

Is Canada's borrowing landscape set for dramatic change?

With major lenders’ fixed rates creeping steadily upward in recent months and significant movement potentially on the way for the Bank of Canada’s benchmark rate, the Canadian mortgage landscape could appear markedly different in a few months’ time.

Rock-bottom interest rates were among the main factors that fuelled Canada’s COVID-19 housing market boom as would-be buyers rushed to avail of slashed borrowing costs as the pandemic took its hold on the Canadian economy.

However, after signalling in its January rate announcement that the days of those record-low rates were numbered and that rates “will need to increase,” the central bank appears poised to take decisive action on its trendsetting rate, as expectations grow of a supersized hike to follow March’s quarter-point increase.

That would arrive amid recent further fixed-rate hikes by the country’s largest lenders including the Big Six banks and giants such as Manulife and First National as government bond yields continue to surge.

The end result is that borrowers will soon need to contend with higher mortgage costs irrespective of whether theirs is a fixed- or variable-rate product, according to a leading figure in the Canadian mortgage industry.

Leah Zlatkin (pictured top), a licensed broker and expert, told Canadian Mortgage Professional that those rising costs will likely be compounded by inflation, which has recently ballooned to levels not seen in over 30 years in Canada.

“For people who are looking to do a fixed-rate mortgage, qualifications are starting to get more challenging. For people doing a variable rate mortgage, we see rate hikes coming,” she said. “I think it’s time to brace and get ready to pay a little bit more on your mortgage payments.

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“If it was mortgage payments alone that we’re bracing for, [that’s] not such a big deal. But the fact is, inflation is getting a little crazy. We’ve got grocery prices, we’ve got gas prices, we’ve got all this stuff that’s going up.”

In that landscape, borrowers will need to be extra careful as they weigh up their options ahead of deciding to take the plunge into the homebuying process, Zlatkin said, with housing market conditions potentially set to look a lot different than they did a matter of weeks ago.

“People need to think very seriously about what they’re doing and whether they can afford to take on a new mortgage, or whether they can afford to do the refinance they want to do before they start investing into it,” she said.

“For many Canadians, everybody’s sitting where they’re at – and it just means that people might not be able to shop around as much.”

Those rising fixed rates pose an added headache for many would-be buyers due to stress test rules that state borrowers must be tested at a rate of 5.25% or the contract rate plus 2% – whichever is higher.

As fixed rates offered by many lenders continue climbing above 3.25%, that means borrowers who choose fixed options must be tested at the higher rate – and will also have repercussions for homeowners looking to refinance, according to Zlatkin.

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“A calculation above 5.25% may mean they’ll need to stay with their current lender because they cannot afford to be stress tested at a higher rate,” she said. “This eliminates the opportunity to shop around for better mortgage rates.”

That nuance means that some customers who may have originally preferred a fixed-rate option could ultimately opt for a variable rate, Zlatkin said – although she emphasized that variable borrowers were likely to start feeling the pinch once the Bank of Canada’s plans for its benchmark rate take root.

“As soon as we see these two [central bank] rate hikes that are probably coming, at that point that may definitely start impacting people’s budgets,” she said.

The prospect of consecutive Bank of Canada rate hikes in April and June appears to have been heightened by that worsening inflation crisis, with deputy governor Sharon Kozicki having indicated in recent weeks that the Bank was prepared to act “forcefully” to deal with the problem.

Zlatkin said successive rate increases could serve to put an “emergency brake” on an inflation scenario that appears more serious than the Bank first envisaged.

“One of the biggest ways that the government can actually make dramatic changes when inflation starts getting out of control is to use the Bank of Canada’s overnight rate,” she said. “I think they’re certainly going to start trying to use that power.”