Rising interest rates could hurt many homeowners

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Rising interest rates could hurt many homeowners

< p class="sc-v64krj-0 knjbxw">Many owners could see their mortgage payments increase.

Homeowners who have opted for a variable rate loan will be particularly affected by the rise in interest rates which should continue at least until the end of the year. They may have to pay more in the coming months.

The Bank of Canada is expected to raise its key rate on Wednesday, and it will do so at several recoveries by December, and possibly beyond, depending on the economic situation.

For example, for a $300,000 mortgage, a 0.5 percentage point increase in interest rate represents an increase of $90 per month, or more than $1,000 per year.

< p class="e-p">In the country, about a quarter of mortgages are at variable rates. But over the past year, says the Canada Mortgage and Housing Corporation, the number of people who have used this type of loan has increased.

Tara Bourassa-Ochoa, Senior Research Economist at housing at CMHC.

In 2021, there was a fairly significant gap between variable rates and fixed rates, variable rates which were much lower, so for some, more attractive, and so we have a majority of Canadians, last year, and even earlier this year, who decided to opt for a variable rate, points out Tara Bourassa-Ochoa, senior housing research economist at CMHC.

For these owners, the next few months will therefore hold some unpleasant surprises. Either the mortgage payment will increase, from period to period, so we will see it because the interest rate will increase, or, there are other cases where the proportion of principal versus interest will change, explains Tara Bourassa-Ochoa.

According to Jean-Francois Perrault, Senior Vice-President and Chief Economist at Scotiabank, homeowners who negotiated a 5-year fixed rate loan, the vast majority of homeowners, shouldn't suffer the consequences as great as those who have a variable rate loan.

[These rates] are more a function of market interest rates, so interest rates on five-year government bonds, which have already increased a lot, because, obviously, these are interest rates that depend on what we anticipate will happen in the years to come. The rate hike that is expected in the very short term is already incorporated into these interest rates, he recalls.

Jean-François Perrault, senior vice-president and chief economist at Scotiabank.

Even if interest rates continue to rise, these owners could get away with less unpleasant surprises. When the Bank of Canada raises rates, it's not clear that five-year interest rates will rise much, Perreault said.

The staggering rise in house prices in New Brunswick, as elsewhere in the country, dampened the hopes of many who wanted to buy a first home. Now, rising mortgage rates will prevent many more from becoming homeowners.

“Let's say, younger ones, this may be the worst thing that doesn't happen.” never arrived.

— Anne Smith, Realtor at Royal LePage Atlantic

Anne Smith, Realtor at Royal LePage in Fredericton, has noticed that young couples tend to lower their expectations , question of being able to afford a house.

Anne Smith, real estate agent at Royal LePage Atlantic.

Many want to take advantage of current interest rates before they rise too much. People […] don't want to wait, they really want to buy a house, they're afraid they won't be able to buy at all in a year, in six months, because interest rates keep going up, explains Anne Smith.

For young couples, the next year will not be easy according to Jean-François Perrault.

Rising mortgage rates make it even harder to afford home ownership.

Unless there is a big drop in house prices, which we don't. x27; foreseen, necessarily when interest rates increase, it limits affordability more, he argues.

And the difficulty of accessing property, explains the economist, will have repercussions on the rents that tenants must pay. People who can no longer afford to buy a house, obviously have to stay in rental accommodation […] so that puts upward pressure on rents, which further constrains affordability.< /p>

In general, Canadians are paying off their mortgages. At the moment, according to the CMHC, they are doing it more than ever.

Also, before granting a mortgage loan, financial institutions calculate borrowers' ability to pay in the event of an increase interest rates of 2%.

For now, Canadians are able to make their mortgage payments and are able to make them on time, says CMHC's Tara Bourassa-Ochoa.

In fact, when problems arise, households tend to pay their mortgages before their other debts.

For example, credit cards, lines of credit, personal loans, auto loans, historically speaking, we will see delinquencies increase on the side of these other products, before seeing it on the mortgage side, says -elle.

And this is what is observed at the moment adds Ms. Bourassa-Ochoa. We are still at relatively low levels, but it is an indicator that is possibly a precursor to delinquencies on the mortgage side, she says.

And according to the chief economist at Scotiabank, the current economic context remains relatively positive despite everything. When we look at the specific economic data, when we look at the job market, it remains very very very strong. The increase in interest rates that we are seeing, and which will continue, is taking place in an environment of strong growth, so that somewhat mitigates the concerns we have.

While it is impossible to avoid increases in interest rates, it is possible, in certain cases, to limit their effects, when it comes, for example, to applying for a new mortgage loan, or to refinance an existing loan.

What's attractive right now is that short-term interest rates are much lower than longer-term interest rates, so people are going to have a tendency to want to save by taking a variable interest. It is important, however, that these people be aware that these interest rates will rise sharply in the months to come, warns Jean-François Perrault, Senior Vice-President and Chief Economist at Scotiabank.

For young buyers, real estate agent Anne Smith says she recommends that they prepare for the obligations of buying a home. We will explain to them that they have to save more money for a deposit, to have less debt, to pay their business, their visa, their student debt, of all kinds, faster.

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