Something good news from the Holidays
The Bank of Canada had a staff research note that came out recently titled, “The impact of higher interest rates on mortgage payments” and here are the major takeaways:
- By the end of Nov 2023, roughly 45% of all mortgages had seen an increase in payments. By the end of 2026, all (well except those who opted for 7 & 10 year terms) will go through a renewal cycle
- 80% of all mortgage holders will face a payment increase by end of 2025
- Among variable-rate holders, those with a fixed payment (CIBC & TD primarily) who have not taken action to avoid large future increases ill see a median payment increase of 54%
- In a simulated scenario(shown below) the median monthly mortgage payment would increase 34% from $1,200 in Feb 2022 (the peak of the market) to $1,600 by the end of 2027
- The key implication of the work was that as long as borrowers experience income growth, most mortgage holders will not face sever financial stress from the increase in mortgage payments over the coming years
The Gift from BoC – Aside from the paper, their pivot is continuing to filter through the 5-year Government of Canada bond yield (dictates pricing for 5-year fixed mortgages). As a of this morning yields were sitting at 3.23% which is down nearly 120 bps (1.2%) from the September peak.
As a result, deep discounted 5-yr fixed rates have fallen more than 50bps from the October highs, with some insured offerings down closer to 100bps. And there will certainly be more to come if bond yields hold where they are now.
This turnaround has resulted in an increased confidence in the real estate outlook index as shown in the Bloomberg Nanos Confidence Index (shown below). I think part of this optimism is an increased belief that rate cuts will come early in 2024 and as a result there will be a re-ignition of a higher level of demand resulting in higher prices
