holding down the size of their monthly payments by opting to take out loans that offer the lowest initial interest rates. The problem with these variable-rate deals is that their rate increase automatically along with the country’s benchmark borrowing cost. This is particularly concerning since Bank of Canada policy makers are expected to lift the rate from the current 0.25 per cent this week, in a bid to quell soaring inflation. This will be followed by several more increases over the next couple of years.
Even an increase of more than one percentage point in the BoC’s rate will backfire on homeowners, since it would drive the cost of their home loans above that currently offered on conventional fixed-rate deals, leaving overstretched buyer struggling with surging borrowing costs. “If the Bank of Canada goes at least as far as what the rates market has priced in, you’re going to have arithmetically at least a 25 per cent plunge in residential real estate values,” David Rosenberg, an economist who predicted the 2008 US housing crash and now runs Rosenberg Research & Associates Inc., said.
He of the view that if anything, the market may be underestimating the number of rate hikes which may follow if the central bank panics in the face of the fastest inflation in 30 years. “There’s a greater risk that they over-tighten, and they might over-tighten by even a couple of rate hikes.”
However, average homebuyers, investors and mortgage brokers do not appear to share his views, as they believe the central bank may not actually raise interest rates significantly. Vlad Maevskiy, a housing investor told BNN Bloomberg that if the past is any indication, things will be fine. Since before the 2008 financial crisis, the bank of Canada has not had a policy rate higher than 1.75 per cent and with the pandemic still ranging across the country, he says the central bank has plenty of reason to keep borrowing costs low. “I don’t believe they are going to increase as many times as they project,” Maevskiy noted. “Even if it goes higher it’s not going to last. There’s going to be another crisis, there’s going to be another something that’s going to bring all those rates down again. So you’re better off still paying variable.”
