How will mortgage rate hikes affect your home?

Those looking to gain a foothold in Metro Vancouver’s already pricey housing market are facing another hurdle as key financial institutions across the country move to hike mortgage rates.

On Thursday, five-year fixed mortgage rates edged near the four-per-cent range at many financial institutions after hovering near the three-per-cent mark for months. RBC posted its five-year rate at 3.89 per cent, while BMO and Scotiabank offered 3.79 per cent and CIBC 3.69 per cent.

And prospective home buyers likely won’t be able to wait the trend out this time around, analysts said. According to Benjamin Tal, deputy chief economist at CIBC world markets, the increases are a sign of things to come.

“Interest rates are rising for a reason,” he said, attributing the changes to an increasingly healthy U.S. economy, which analysts believe will benefit Canada as well.

“The unemployment rate will go down, the wages will rise — you know, the positive impact of good economic news — and that will allow people to be able to tolerate this increase in interest rates to a bigger extent,” he said.

Limits on mortgages secured by the Canadian Mortgage and Housing Corporation may also be playing a role.

Increased rates due to a rebounding U.S. economy are good news in the long term, but in the short term may mean more belt-tightening for those looking to buy a home or who have already leveraged themselves to the hilt to finance an existing mortgage, Tal said.

“I think given the fact that we’ve borrowed so much over the past five, six years, as a society we’ve become extremely sensitive to higher interest rates. And it’s starting — we are already starting to see people thinking twice about buying that second TV.”

The increases may also lead prospective homebuyers to think twice about getting on the property ladder in the Vancouver market, said mortgage broker Jessi Johnson,

“It definitely will affect people’s ability to qualify (for a mortgage),” he said, noting those who do will likely wind up with less money to play with and may look to other cities, such as Surrey.

For those who are already operating on razor-thin margins, Johnson advised planning ahead for what increasing rates may mean for their financial situation when their mortgage is due for renewal.

“People need to jump on an online calculator and ask ‘what does this do for my monthly cash flow?’” he said. While many people sign up for the maximum mortgage they can get, Johnson said, that’s not always a good idea because they don’t often stop to think about the possibility that rates can rise, sometimes substantially.

“The biggest issue is people get maxed out.”

But Geoff Lee, another mortgage broker in Vancouver, said he doesn’t think homeowners — or prospective ones — should panic just yet.

He’s not convinced the hikes are an indication of a steady upward trend.

“It’s like a gas war — as soon as one lender is gonna knock it back down, then you’re going to see people follow,” he said. “There’s really no reason why the fixed rates should be increasing, other than (the banks are) trying to make some money in an environment where they haven’t made much money at all.”

Compared to historic interest rates, which decades ago were commonly in the double digits, a four per cent borrowing rate is nothing to get excited about for some economists.

“There’s no question some buyers on the margins will be squeezed out,” said Cameron Muir, chief economist with the B.C. Real Estate Board, but in general, rate increases of less than one per cent won’t have a measurable impact on Vancouver’s housing market.

He added Lower Mainland housing sales have rebounded in the last six months from last year, where they hit lows not seen since the late 1990s. That trend was influenced partly by the reduction in mortgage amortization periods from 30 to 25 years introduced last year.

Muir’s latest housing forecast, released Thursday, predicts increasing rates may mean growth in sales will slow, but overall the upward trend will continue. There may even be a spike in the short term as buyers already approved for mortgages at a lower rate scramble to get in the market.

But given the economic indications, people should approach the market cautiously, particularly of they are already dealing with consumer debt, said the Credit Counselling Society’s Scott Hannah.

The increased rates may inspire people in precarious financial situations to hold off on purchasing a home, he said. But for those already in the market and “living on the edge of their paycheques,” the increases will necessitate a retooling of the household budget in order to stave off consumer debt.

Hannah advises homeowners in tight financial situations to adjust their spending habits so that they can meet mortgage payments and avoid relying on unsecured debt, like credit, to meet other expenses, such as car payments.

Better to let go of the car altogether than go into consumer debt and risk losing a house, which in the long-term will earn equity, he said.

“The worst thing you can do when the rates go up quicker than the housing market cools off is now be in a position where you have to sell your home,” Hannah said. “You’re going to lose money.”

Source: Jessica Barrett, Vancouver Sun

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