Borrowers with variable-rate mortgages and HELOCs will feel the pinch first
The Bank of Canada reveals its rate decision tomorrow and just about everybody thinks it will be an oversized 50 basis point hike.
In fact, all 30 economists polled by Reuters predict a half point rise June 1 and what’s more see rates higher at year-end than predicted just a month ago.
If there was any doubt April’s CPI numbers ended them, says Capital Economics. Headline inflation rose to 6.8%, much higher than the Bank’s own forecast of 5.8% just the month before.
Core inflation is even a bigger problem, said Capital, with all three measures tracked by the Bank now above 3%, the ceiling of the target range.
However, there’s not so much consensus on where the Bank will end up.
Housing’s vulnerability to rate hikes is a concern, but April’s 12% slump in home sales isn’t enough to turn the Bank’s course — at least not yet, wrote Capital’s chief North American economist Paul Ashworth.
“The Bank was banking on some weakness in housing as interest rates rise – that is one of the key transmission channels through which higher rates are expected to cool demand and, by extension, bring down inflation,” he said.
Capital expects a 10% drop in Canadian home prices and “as housing conditions go from bad to worse, we expect the Bank of Canada to eventually change its tune.”
After two more 50 bp hikes bringing the policy rate to 2%, Capital expects the Bank will ease off to 25 bp increases, peaking at 2.5%. It expects the rate will stay there until well into 2024.
Oxford Economics is even more dovish, seeing rates at 1.75% by the end of year, rising to 2% in 2023 and staying there until 2025.
On the hawkish side are Bank of America strategists who forecast the policy rate reaching 3.5% by April 2023, with upside risks for further hikes.
The median in the Reuters poll has rates at 2.25% next quarter, 2.50% in the fourth quarter, peaking at 2.75% in the first quarter of 2023.
Mortgage brokers saw a slight dip in inquiries after the Bank first hiked rates, said Sung Lee, an expert with RATESDOTCA.
“Rising rates are pushing many would-be homeowners to qualify higher than the current qualifying rate of 5.25 per cent, causing them to either hold off on purchasing or turn to alternative methods to raise the amount of mortgage they can afford, such as credit unions or private lenders,” he said.
The ones who will feel the pinch first are those who overextended to buy homes in Canada’s hot housing market with a variable rate-mortgage and tapped into home equity with a HELOC.
Lee said combined mortgages and HELOC products (CLPs) had swelled to $710.3 billion by the end of 2021. In February alone, Canadians took out $2 billion in HELOC debt.
RATESDOTCA calculates that if the Bank raises the rate half a point a household with a variable rate mortgage of 1.9 per cent on $500,000 would see monthly mortgage payments rise $122 to $2,215.
If the household also had a HELOC of $65,000 at 3.7% interest-only monthly payments would rise $28 to $228 a month, bringing the total payment to $2,443 a month, an increase of $150.
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The Canadian dollar got a boost Monday when data showed Canada’s current account surplus swung to a $5 billion surplus in the first quarter after a $137 billion deficit in the third quarter.
That surplus crushed expectations of $3.25 billion and was the biggest in almost 14 years.
CIBC economist Andrew Grantham said energy products drove the surplus in goods trade, swelling $6.5 billion from the quarter before on higher prices alone. Forestry products and building materials also helped. Economists expect that high commodity prices will continue to support the country’s current account in the second quarter as well.
The loonie hit a five-week high of 79.04 US cents after the data came out.
An astonishing 81 per cent of Canadians recently told Mercer Canada researchers they were at risk of burnout at work.
But how do you take a step back at work without sacrificing your financial stability? It isn’t easy, but experts argue it could be the best investment you ever make.
Source: Financial Post