Canada’s latest mortgage rate hike should not impact Canadians’ ability or desire to refinance or renew their mortgages, experts argue.
On Wednesday, the Bank of Canada raised its key interest rate to one per cent, the highest rate increase in more than 20 years, with a warning that further rate increases could be on the horizon.
Allison VanRooijen, vice president of consumer credit at Meridian, said Canadians have experienced an extended period of low interest rates, meaning this rise may be new territory for many mortgage holders.
“This will be a new era for that group and an area we'll be keeping a close eye on,” she said in a recent phone interview with CTVNews.ca.
“Those borrowers coming up for renewal, maybe in the next two or three years, we'll start to see their renewal rates come in a little bit higher than they’re used to.”
VanRooijen explained that with a $450,000 variable rate mortgage, Canadians can expect to pay about $100 extra per month with this latest increase. While this may not break the bank, combining the extra mortgage fees with rising costs of groceries and gas may have more Canadians feeling the crunch.
“It's this confluence of pressures on household budgets, all at the same point in time,” she said. “Our best advice to consumers is if you are starting to feel that pinch, take a step back and go back to basics. Look at the cash flow coming in, look at the budget and cash flow going out and see if there are adjustments that need to be made.”
Chase Belair, co-founder and principal broker with Nesto Mortgage Experts, said variable rates are still an attractive option because the key interest rate would have to go up several more times to match the fixed rate and the penalty for breaking a mortgage contract is less severe.
“You would need seven announcements like this at 0.25 (per cent) increase to even catch up to what the best fixed rate is today,” he said. “That's a lot of increases.”
“I would give the same advice to someone renewing today as someone refinancing today: this does not make the variable rate any less attractive than it previously was.”
Belair said most Canadians on variable rate mortgages should still be able to afford the rate hike because they would’ve needed to pass a stress test before getting approved for their mortgage.
“You must prove your ability to afford a mortgage at a much higher rate,” he said.
VanRooijen said her firm will be keeping an eye on mortgage renewals, as those shopping for a better rate will likely face a higher bar to qualify.
“In a low-rate environment, we've seen a lot of borrowers switch financial institutions at the time of renewal, they can rate shop,” she said. “But with higher rates come higher bars for requalification if they are to switch, so we'll be keeping a close eye on what this means for a borrower's ability to switch mortgage lenders.”
Both VanRooijen and Belair believe that this latest rate hike shouldn’t scare someone away from looking at refinancing or renewing a mortgage.
“We are in an era of record-low interest rates,” Belair said. “With the cost of everything else around us going up, there is still savings in mortgage renewals and mortgage refinancing.”
With files from The Canadian Press
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