How will rate hikes from the central bank affect mortgage holders?

Only one day left to the central bank’s first rate meeting this year.

And the main thing here is that whether Governor Tiff Macklem and the Bank of Canada decide to start raising rates on Wednesday or not, it seems quite obvious that rates will go up during the next few months.

The most important question is how much the BoC may raise over this cycle and how it could affect mortgage holders.

According to James Laird, co-founder of Ratehub, Canadian lenders have already begun to increase their variable and fixed rates waiting for the Bank’s decision.

“At the same time, there are still those who have not yet raised their rates. It means that if you need a mortgage in the next 120 days, it’s best to apply faster in order to book the current rate,” – he noted.

Today, fixed-rate insured mortgages are varying from 2.49% to 2.79%. Meanwhile, only a few months ago you could get a rate below 2%. In addition to it, variable-rate discounts are going down by 0.10-0.20% from some large banks.

In case the central bank raises its key lending rate by 0.25% on Wednesday, a mortgage holder with a five-year variable rate will pay almost $12 more monthly for every $100,000 of the debt.

BMO senior economist Robert Kavcic says the national mortgage market will not be able to avoid rate hikes in 2022.

“Canadian mortgage rates look like a coiled spring set to unwind, but we don’t know exactly by how much,” – he added.

“In terms of the five-year fixed rates, the Government bond yields may lead to a further rise by 0.50% or more. Variable rates could grow by 1% or more this year.”

On Monday, the market had expected up to seven rate increases in 2022, Bloomberg says. That would lead the BoC’s rate to 2%.

However, certain economists believe this timeline is too steep.

Stephen Brown of Capital Economics considers the market forecasts quite odd, as they suggest that the central bank will raise faster and harder than the U.S. Federal Reserve, even though inflation is higher in the U.S.

In addition to it, Canada’s economy with its excessive dependence on interest-rate-vulnerable real estate sector is very different from its southern neighbour.

Capital Economics says the risks will make the central bank take a pause during its tightening cycle at 1.5%, which is about 0.50% lower than the market predicts.