Mortgage market is about to get a bumpy ride

It seems that rates will go up within the next few months, regardless of whether Governor Tiff Macklem and his deputies pull the trigger Wednesday or not.

The real question is how much the Bank might hike in this cycle and what it means to mortgage holders.

James Laird, co-founder of Ratehub.ca and president of CanWise Financial Mortgage Broker, says lenders in Canada have already started to move their variable and fixed rates higher in anticipation of a Bank of Canada hike.

There are still some lenders that have not yet increased rates. If you need a mortgage in the next 120 days, it is best to apply quickly to hold today s rate, he said.

Sung Lee, a RATESDOTCA expert and mortgage agent, is seeing rates rise. He said that fixed-rate insured mortgages are now ranging from 2.44% to 2.79%, while clients were able to get sub 2% a few months ago.

It is possible that there will be a reduction in variable-rate discounts on top of prime rate increases. Lee said that rising rates will have a big impact on borrowers as the cost to access credit continues to get more expensive.

If the bank raises its overnight rate by 25 basis points tomorrow, a homeowner with a five-year variable rate mortgage of $649,530 at 0.85% over 25 years would see monthly payments rise from $2,404 to $2,477, according to Ratehub.ca's mortgage calculator.

That is more than $73 more per month or $876 per year on their mortgage payments.

If the Bank raises the rate by 50 basis points, monthly payments would rise to $2,551. That is $147 more per month or $1,764 a year.

If those mortgage amounts sound high, remember that the average house price in Canada was $713,542 in December 2021.

Robert Kavcic, Senior economist at the BMO, says that the mortgage market will no longer be able to hide from higher rates this year.

Canadian mortgage rates are like a coiled spring set to unwind, but by how much? He wrote a note this week.

The underlying GoC yields could easily point to further upside of around 50 bps or more on the five-year fixed side of the market. Over the course of the year, 100 bps or more of BoC tightening is on the cards on the variable side. The mortgage rate the market is priced off from 1.8% at the end of 2021 to 2.7% by the end of 2022.

By the end of the year, the market had priced in up to seven rate hikes, which would bring the Bank's rate to 2%, according to Bloomberg data.

Some economists think this timeline is too steep.

Stephen Brown of Capital Economics thinks the market pricing is puzzling, because it assumes that the Bank of Canada will hike faster and further than the U.S. Federal Reserve, even though inflation is higher in the States.

The makeup of Canada's economy with its over-reliance on interest-rate sensitive housing is very different from its southern neighbour.

Capital believes that the bank will have to pause its tightening cycle at 1.5%, about 50 basis pointer lower than what the market expects.

Analysts at the Pacific Investment Management Co. believe that the central bank will move just four times this year, which is in line with expectations for the Fed, according to Bloomberg.

Vinayak Seshasayee is a portfolio manager who oversees Pimco's Canadian fixed-income assets told Bloomberg that Canada's high household debt and slack remaining in the labour market despite the jobs recovery will prevent the Bank from pushing rates too far, too fast.