Canadian homebuyers are starting to feel the pain of the U.S. recovery — a surge in mortgage rates that has added close to 10 per cent to the monthly costs of carrying a home, just since the spring.
This week, the Royal Bank of Canada boosted its five-year fixed-rate mortgage to 3.89 per cent. Bank of Montreal and TD Bank followed with hikes to 3.79 per cent, with other lenders expected to join in.
The story has been the same south of the border where U. S. mortgage rates jumped this week to a two-year high of 4.58 per cent, up from 4.4 per cent for a 30-year fixed-rate mortgage. The average 15-year rate climbed from 3.44 to 3.6 per cent.
Climbing rates have done nothing to slow the resurgence of the U.S. housing market which saw sales of existing homes jump 6.5 per cent in July, to a three-year high.
Canadians continue to enjoy some of the lowest interest rates in history. But the surprising surge of fixed rates towards four per cent — when they raised the ire of Finance Minister Jim Flaherty just last March at 2.99 per cent — is expected to dampen house sales and Toronto’s record-setting prices come late fall.
Consumer spending is also likely to take a tumble.
"It’s not that Canadians are going to be defaulting on their mortgages like happened in the U.S. It’s simply that they’ll be spending more money to finance debt and spending less on other things, like a new TV or vacation,” deputy chief economist at CIBC World Markets.
He anticipates the worst of the rate hikes may be over, but the pullback in consumer spending could be so significant, “it will cause Canada to underperform the U.S. and many other countries over the next year or two because our domestic economy is very sensitive to higher interest rates.”
Just last May, the five-year fixed mortgage being offered by the major banks hit a record low of 2.89 per cent. That means someone who bought then would have had monthly payments of about $1,497 on the average $320,000 mortgage, says broker Steve Garganis of Mortgage Intelligence.
Anyone taking out the same mortgage today at 3.89 per cent would be paying $1,664, or $167 more per month. But, more importantly, that adds up to about $15,000 in extra carrying costs over the five-year term.
Some 80 per cent of home buyers now opt for fixed-rate mortgages, but this week’s rate hike could start shifting borrowers’ preferences, given that the best variable rate now stands at 2.5 per cent, says Kerri-Lynn McAllister of Ratehub.ca.
Variable rates are tied to the Bank of Canada rate, rather than bond yields, which isn’t expected to climb until at least 2014.
In the meantime, realtors and mortgage brokers are bracing for the usual rush of renters and move-up buyers, armed with pre-approved mortgages in many cases below 3 per cent, determined to buy before their low rates expire in the next 90 to 120 days.
"We’ve noticed a massive increase lately in people calling and wanting to start looking." says a local Toronto Realtor. “I don’t know how much of that is interest rates and how much is seasonality, but rate hikes typically accelerate the market and get people out looking.”
In fact, the rate increases are considered a major factor in what have been unusually strong home sales the last two months: House sales across the GTA were up 16 per cent in July, year over year.
House prices have also continued to climb, up 8 per cent in July, year-over-year, to an average $513,246.
Even the condo market, which has been a concern for many, including the Bank of Canada, has proven to be remarkably resilient, with sales up 10.5 per cent in July and prices up 3.4 per cent.