Variable-rate mortgage borrowers, who have already seen interest costs rise more than 70% over the past year, took another hit last week as the base rate hit a 22-year high of 7.20%. The key interest rate, which is used to price variable rate mortgages and personal and home contribution lines of credit (HELOCs), generally takes its cues from moves by the Bank of Canada’s target overnight interest rate, which the bank increased by 25 basis points on Wednesday. Each quarter-point increase (0.25%) translates to roughly $13 per month for every $100,000 of mortgage debt for variable rate mortgage holders, who currently make up about a third of the mortgage market. 70% Increase in Interest Costs in One Year Since the BoC started raising interest rates last March, variable rate borrowers have seen their monthly interest cost skyrocket by about 70%. “If you were a variable rate holder and your mortgage was at the high-1% level last year, you would have paid $397.39 [per $100,000 of mortgage]Dan Poulter, Senior Vice President, Strategic Initiatives at TMG, told CMT. “Now, you’re paying $651.74 on a 25-year mortgage, a difference of $254.35 (a 64% increase), and on a 30-year amortization the difference is $264.86, a 77% increase.” Considering the average mortgage size is about $312,000, according to Equifax numbers, that translates to roughly $820 more in interest each month for the average borrower. Despite a sharp rise in borrowing costs as a result of the 10 interest rate increases from the Bank of Canada, Poulter says floating rate borrowers have so far been “very flexible”. “What we’ve noticed so far is that people have found creative ways to manage the increases,” he said. “The big question on everyone’s mind is, when/where is the breaking point?” For example, Boulter says some borrowers have held a fixed rate early on, while some have refinanced to extend their amortization and lower their total payments, while others have used the money to invest in the stock market or other investment vehicles and have reduced their debt. By reducing your total mortgage and/or debt load. “They’ve done whatever it takes to create some level of predictability and manage monthly cash flow,” he said. “What we haven’t seen yet is landlords selling their properties because they can’t manage the payments.” Stimulus rates and extended amortization increases have resulted in higher monthly payments for those with adjustable rate mortgages. The Bank of Canada estimates that these borrowers have seen their payments monitored by more than 50% as of May – before the last two rate hikes. But those with a fixed pay variable rate mortgage face another type of problem. Fixed payment variable rates, which are offered by banks such as TD, BMO and CIBC, mean that the borrower’s monthly payment stays the same, while the portion devoted to interest costs goes up and the amount going towards reduction of principal goes down. This has extended the average depreciation period, in many cases beyond 35 years, which has caught the attention of regulators. As of May, before the BoC’s latest rate hike, a report from Desjardins estimated that more than three-quarters of these borrowers had already reached their tipping point, meaning all of their monthly payments were for interest costs. The repayment shock for these borrowers will come when their mortgage renewals are due, when their banks adjust their monthly payments to get them back on the originally contracted repayment schedule. Can the initial interest rate be as high as 7.45%? What could start to cause real havoc for existing variable rate mortgage holders is any further hikes beyond this point. While the Bank of Canada has indicated that any future moves will depend heavily on economic data to be released in the coming weeks, some believe an additional quarter-point rate hike in September is still possible. The constant hardcore tone inside [the Bank’s] And CIBC economist Andrew Grantham wrote last week: For the Bank of Canada to feel compelled to deliver another quarter-point increase at its September meeting, Grantham says the economy will have to underperform the Bank’s latest forecast and inflation will have to “make headway.” Hurry to the goal” of the bank’s current projects. This poor performance may not come soon enough to prevent another 25 basis point rally at the September meeting, which, given the tone of [this week]now looks likely.” Markets remain in agreement with that assessment. As of Monday, bond markets were pricing in at least 75% of the odds of another 25 basis point hike in September, though those odds could change. Very quickly as new economic data becomes available.An additional rate hike could push the target overnight rate to 5.25%, which would mean a prime rate of 7.45%.The last time Canadian borrowers saw the key rate rise was in 2000.
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