We’ve been talking a lot about what an interest rate hike might mean for Canadian homeowners. Now it looks like mortgage rates are finally on the rise in Canada.
Last week, several of Canada’s largest banks increased their mortgage rates, bringing them closer to 4% than they have been for a while.
But why are interest rates rising? Erica Alini at Macleans.ca says it is due to the recovering U.S. economy.
“Foreign capital that flocked into Canada […] is now flowing out and much of it to the U.S.,” she writes. Though it is hard to show concrete evidence of how much of an effect foreign investment has on Canadian real estate, the assumption is that higher housing prices in Canada and economic recovery in the U.S. will keep more foreign investors away.
Advice from experts at ComFree Commonsense Network
“Homeowners living paycheck to paycheck will be caught between a rock and hard place if their variable mortgage rate goes up,” says Randall Weese, Licensed Broker of Record at ComFree Commonsense Network brokerage in Ontario. “Whether you currently own a home on a variable mortgage or are planning to buy a home in the future make sure you leave room for fluctuations in interest rates.”
“With strong wage growth and low unemployment across Alberta, a moderate rise in mortgage rates will likely not dampen housing demand or prices much in the short term,” Scott Bollinger, Licensed Broker in Alberta, adds. “In fact, housing in Alberta continues to be relatively affordable compared with the long-term average.
“However, the consensus is that rates will continue to rise over the next few years which will help to stabilize prices,” Scott continues. “Keeping this likely trend in mind, it would be prudent for buyers to consider the impact of higher carrying costs in the years ahead as they set their budgets and search for new homes right now so that they aren’t caught off guard by any sharp increase when it comes time to renew.”
What does this mean for Canadians?
According to an interview by the CBC, “Every half-point increase in rates impacts a person’s buying power by $15,000.” Because interest rates have been low for a while, more people have been able to buy. However, with interest rates beginning to rise, that will affect Canadians’ ability to invest in real estate.
Those who talked about a housing bubble and crash said that higher mortgage rates cause a decline in housing prices. But as Scott pointed out in his editorial in the Edmonton Journal last May, housing remains affordable even though prices have gone up.
Additionally, as one mortgage planner points out on his blog, “Rising interest rates generally occur in a healthy economic environment.” While higher mortgage rates mean more debt for buyers, they usually coincide with periods of rising incomes and higher employment levels.
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