If you've been worrying about rising mortgage rates, you're not alone! With home prices still near all-time highs in Victoria and Vancouver, Canadian home owners owe more on their mortgages than ever before. How dire is the situation? We took a look back to see what could happen.
Canadian mortgage rates hit an all-time low in 2016, with many clients able to get interest rates well below 3%. Since then, government regulations that reduce the risk to mortgage lenders, as well as interest rate hikes by the Bank of Canada (BoC), have meant that rates are starting to creep back up.
How high can mortgage rates go?
Historically speaking, rates are still extremely low in Canada. Leading up to the 2008-09 recession, five-year fixed rates were between 6%-7%, while variable rates were around 5%.
Canada saw the highest mortgage rates in the early 1980s. According to the BoC, the average 5-year rate peaked in September 1981 at 21.46%. At the time, interest rates were on the rise to try to stem inflation. Those extremely high rates didn't last for very long, but the average mortgage rate was above 8% well into the 1990s.
On the scale of history, Canadians are still getting a great deal on their mortgages despite recent rate hikes. Fortunately, economists aren't predicting a return to the sky-high rates of the early 1980s. The consensus seems to be that the BoC will continue to raise rates over the coming years, but it's unclear how quickly those adjustments will come. With more experience, there is less chance of a sharp overcorrection in rates. The BoC itself has said it will move forward cautiously. However, the economy doesn't always follow predictions and anything could happen.
What does this mean for you?
If you already own a home and have a fixed rate mortgage, rising rates will only affect you at renewal time. Your mortgage rate is guaranteed to stay the same for its entire term. Another piece of good news is that if you qualified for a high ratio mortgage in the past year, the mortgage qualifying stress test already simulates a higher interest rate – up to 2% more than your actual contract rate – and assumes that your income and debt will stay the same. Since your situation is likely to improve over the term of your mortgage, you're actually in a good financial position.
If you have a variable rate mortgage, your rate – and your payment – will go up and down with the prime rate, which in turn is based on the BoC rate. You would have qualified for your mortgage at a higher rate than your contract rate, but if you're worried about the changes, you can choose to lock into a fixed rate mortgage at today's rates. Over the course of history, variable mortgage holders have usually come out ahead.
We don't have a crystal ball, so we can't tell you whether or not mortgage rates will rise in the near future. However, the market tends to run in cycles, so we can't stay at low rates forever. If you're planning for the future, the best thing you can do right now is pay down your mortgage as if you were already at a higher rate, subject to your contract terms. Your current low rate means that more of your payment is going towards the principal amount, so you will be mortgage free sooner and won't have to worry about what interest rates are doing for as long!
If you want to discuss your options in the face of rising rates, set up an appointment with one of our mortgage brokers today. Call us Toll-Free at 1-855-590-6520 or visit us at 307 Goldstream Avenue during regular business hours. We can also arrange an appointment evenings or weekends to work with you.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.
