already moved up. But the variable rates, for sure, that’s where the impact is,” Samantha Brookes, founder and CEO of Mortgages of Canada, told BNN Bloomberg in an interview. A survey conducted by Bloomberg found that economists expect the central bank to increase its benchmark rate five more times in 2022, bringing it to 1.75 per cent by the end of the year. Meanwhile, Brookes says that variable mortgage rates would have to increase to a range between 2.5 and 3.5 per cent before they start to meaningfully drag on the housing market.
According to Rob McLister, a mortgage columnist at The Globe and Mail, home loan rates are a primary determinant of housing demand, along with employment, credit availability, household formation, as well as the mortgage qualifying rate. With mortgages representing about 10 per cent of Canada’s GDP, the Office of the Superintendent of Financial Institutions (OSFI), and the Finance Department introduced a mortgage stress test in 2017, in order to safeguard against potential shocks in the housing market. Accordingly, all home loan applicants must prove that they can handle mortgage payments at either 5.25 per cent or the contract rate plus two per cent, whichever is higher.
“Variable rates would have to rise 180+ [basis points] —i.e., from an average of 1.45 per cent (prime [minus] one per cent) today to over 3.25 per cent —for qualifying to be curtailed in a meaningful way,” McLister wrote. “And even then, desperate buyers could resort to non-prime lenders or those who don’t use the federal stress test (i.e., certain credit unions).”
However, with a majority of homebuyers having stress tested themselves against potential rate hikes of up to 5.25 per cent, some experts are of the view that the impact of rising mortgage rates on the housing market may be more “psychological” in nature. “I think the psychological effect of increasing rates will have a greater impact than actual financial capacity. Consumers just haven’t seen five-year fixed rates above four per cent for a long time. That said, we know the recent purchasers have proven mathematically they are capable of qualifying for, and servicing, that rate,” Paul Taylor, chief executive of Mortgage Professionals Canada, said.
He added that if fixed mortgage rates jump to between the range of 4.5 per cent to 5 per cent, that could be recognised as a “market mover”, adding that fixed rate above three per cent that are currently being offered by major banks like Royal Bank are not affecting the market “at all”.
