What Will Happen When Mortgages Rates Rise?

There are growing expectations that mortgage rates are increasing: the question is whether the rising rates will expose the fragility - and perhaps sink - the current mini-boom in housing sales. The flush market remains a bit of a mystery, even in B.C. We have fairly high unemployment, a suffering resource sector and lower counts on everything from tourist visits to exports, yet consumer confidence remains apparently unshakeable. But that confidence may be tested. 

There are a number of signals for a rate hike: the surprising strong housing market (Victoria area MLS sales, for instance, hit a 17-year high last month); a stronger Canadian dollar than what the federal government believes is healthy; and fears of higher inflation. We have long felt that interest rates are too low and now it appears more people maybe agreeing with us. 

After the recent rate hike, the big banks are now charging between 5.78% and 5.84% for five-year, fixed rate mortgages. That is up from 5.25% this spring and, while still low in a historical sense, is harbinger of where rates are heading. (Best rate still at 3.9% though.) It would not take much of an increase to cool the housing market, since there are many first-time buyers and investors now active, lured by what can only be described as overly generous aid from Canada Mortgage and Housing Corp.

 Recently, the federal government raised CMHC's allowable insured mortgage limit to $600-billion, or about double what it was two years ago. In 2008, when the market was slow, CMHC managed to insure nearly $150 billion in mortgages, many of which were likely written with from 5% to 10% down payments. Banks are eager to lend with CMHC mortgage insurance, even to questionable applicants: the insurance protects the lenders from defaults. The result is it is easier and cheaper now to buy a $1 million house than a $1 million office building!!!

 Major Point: We are not saying higher interest rates - which are inevitable - will kill the current housing surge, but we believe it will take froth out of the market, especially for lower-end properties. Lock in now before rates go higher, and talk to your mortgage broker to get the best long-term rate - together with the personal bells and whistles you need.

 By: Ozzie Jurock