After the ultra low mortgage interest rates of this summer, rates from several major lenders may be gradually inching upwards this fall. In the past few weeks, at least a handful of lenders I work with have increased their fixed interest rates between .5-10 basis points (for instance, moving from 2.89-2.94~2.99 per cent). Then again, last year this time rates climbed and levelled off again in the new year, so it may follow a similar trend in 2015. But right now, rates are showing signs of an increase.
What drives up interest rates?
Fixed mortgage rates depend on the bond yield rate, so as the yield rate goes up, so do fixed mortgage rates. Most lenders need to set their rates at least 130-140 basis points above the bond yield to make the mortgage profitable. We saw a spike in interest rates recently as the bond yield reached 1.6 (prior to that, they’d been as low as 1.48). Adding 140 basis points to 1.6 per cent explains why many lenders moved their rates from 2.89 to nearly 3 per cent.
Bond yields come down when there is any type of event in the stock market (for instance, if stockholders perceive a threat to the market due to a natural disaster or international volatility). Stockholders see the risk and move their money over to bonds. Demand for bonds pushes their price up and lower their yield rate. If, on the other hand, the stock market is doing well, investors move their money from bond to stocks so supply decreases and bond yield rate goes up.
A few other factors may influence future rates. As the U.S. Federal Reserve winds up its quantitative easing program and tightens its policies, it may push up market interest rates in the U.S. and Canada, reports the Globe and Mail. Proposed changes to CMHC and lender deductibles could also boost the cost of lending, which lenders would likely pass onto clients in the form of higher rates.
Who will be impacted if rates increase?
While rate increases will be incremental, the experts at a Moody Analytics roundtable predict that homeowners between the ages of 30-45, with limited equity and expectations for income growth will be hit the hardest.
Overall, though, I don’t see such a gradual rate increase having a huge impact on Canada’s real estate market. Sometimes people who are on the fence actually step in and make an offer because they realize that their buying power may be limited in the future by higher rates. If rates do go up by a quarter per cent, the difference will be minimal for most borrowers, perhaps about $20 per $100,000 borrowed (or between $60-80 per month).
This increase would not break most borrowers’ budgets, but if a buyer is counting on maxing out their lending ratio (meaning they want to buy something at the maximum they can qualify for, which I don’t recommend), they may need to shop in a slightly lower price range as a result of higher rates. Sellers may get fewer offers if rates increase.
While it may be too early for buyers to fret over higher interest rates, if you find the right property and qualify for a low fixed mortgage rate, now may be the time to lock in that rate for the next five years. But remember: no one has a crystal ball, so rates can go up or down at any time.