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August 21, 2013

Rates Rise Again. No Housing Threat Yet

Courtesy -  CMT, Canadian Mortgage Trends 

By: Rob McLister, Editor CMT   http://www.canadianmortgagetrends.com/

Fixed mortgage rates have been on a steady ascent since bond yields blasted off in May. Now, the major banks are jacking up rates again.

5-year-bond

Most of the Big 6 are lifting their “Special offer” 5-year fixed mortgages to 3.79% or 3.89%, a 20 basis point hike.

From that, typical well-qualified borrowers can expect at least 20 bps“discretion” (i.e., actual rates of 3.59% to 3.69%). If you know how to haggle, you might do even better.

Mortgage-Rate-Curve

Royal Bank also announced a 20 bps hike in its 5-year posted rate, which rises to 5.34% on Thursday. If a few more banks follow RBC’s lead, the benchmark qualifying rate will rise accordingly. That would mark the first increase in the benchmark rate in more than 500 days(since April 2012).

A higher benchmark rate makes it tougher to qualify for a variable, HELOC or 1- to 4-year fixed term. (Mind you, one 20 bps hike is not as impactful as dramatized headlines like this suggest.)

A 20 bps jump in the qualifying rate means a household at the edge of affordability would need ~$1,100 more income to get a variable-rate mortgage on a $300,000 house with 5% down.*

Looking back to May 1, 2013 is more telling. Since then, a 5-year fixed mortgage payment on that same $300,000 house has risen about $120 a month to ~$1,475. That kind of payment change is a potential source of financial “difficulty” for less than 1 in 10 mortgage holders—if past CAAMP surveys are a guide. Note that "difficulty" does not imply default.

Naturally, all these incremental rate hikes can add up and decelerate home sales. But based on past consumer surveys, it could take a good point and a half rate-bump to curtail buying decisions in meaningful ways. At the moment, we’re only halfway there.


* Note: The benchmark rate has little effect on someone choosing a fixed term of five years or more. That person’s ability to qualify is instead dependent on the actual rate they pay (a.k.a.  the “contract rate”).
Rob McLister, CMT

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