Fixed mortgage rates may go up, but it doesn’t mean Canada’s real estate market will crash

It’s quite possible that positive COVID-19 vaccine news from Pfizer and Moderna will mean the end of the pandemic in the nearest future. However, it may also lead to ending the period of historically low fixed mortgage rates.

As you know, fixed mortgage rates depend directly on Canadian five-year government yields, which had been low because of the pandemic, but started growing amid the mews about the vaccines.

While it doesn’t mean mortgage payments will suddenly skyrocket, it still means searching for a better deal and waiting might be not the best idea now. Moreover, it means households with tight budgets need to think twice before taking on a new mortgage.

For instance, in case you have a five-year fixed mortgage of $500,000 with a 25-year amortization period and a 1.69% rate, your monthly payment is $2,043. With a 0.40% hike, the payment amount will go up to $2,139, so the annual difference will be $1,152, and a five-year change will reach $5,760.

Certainly, it will take some time for bond yields to return to 1.5-1.6% seen in January 2020. The number was up by 0.10% over a week to 0.50% following the news about the vaccine.

At the start of 2020, the central bank’s key lending rate was 1.75%, and the Bank doesn’t plan to raise it until 2023.

The BoC has all the necessary tools to keep rates low, and according to CIBC senior economist Avery Shenfeld, it will use them before eventually returning to normal levels.

“Over the next few months, the Bank’s promise to keep the overnight rates unchanged, combined with its bond purchases, will keep five year Canadian bond yields away from skyrocketing,” – Shenfeld noted.

In his opinion, an eventual easing of bond purchases will lead to a challenge for the real estate market in the form of higher mortgage rates. At the same time, the market will benefit from a stronger job market

Most Canada’s housing markets have been showing a strong activity, with sales and prices exceeding forecasts. As a rule, higher interest rates cool down such markets, but BMO senior economist Doug Porter believes we haven’t reached this stage so far.

“At first, bond yields rose on the recent vaccine news, but they have already settled back slightly on the view that the global economy will have to face a tough winter,” – noted Porter.

“First of all, Canadian five-year bond yields were up by only 0.04% to 0.44%, and it can’t affect the real estate market significantly”.

Porter says the vaccine developments will lead to higher bond yields by sustaining the recovery.

“However, even by the end of 2021, we expect an increase of only about 0.20-0.25% from current levels. Although it will have a moderately dampening effect on the housing markets, it’s still not enough for drastic changes”, – he added.