Buying a house isn’t easy. Not everyone can afford this costly investment. To achieve this, most households turn to a mortgage. This naturally generates interest to be repaid. A rise or fall in these rates has a more or less significant impact at many levels. Let’s take stock.
The impact of rate changes on borrowers
Let’s take the case of an increase. For a fixed-rate borrower, this means higher monthly payments at the time of mortgage renewal. Logically, it becomes more difficult to repay the loan. This increase also discourages new borrowers. The result is reduced motivation. In other words, demand for mortgages will fall. One thing is certain: household budgets are getting tighter, especially for variable-rate borrowers, as the increase is immediately reflected in their payments…
Added to this is a portion of indebted households that are in arrears with their repayments. By the end of 2022, just over 2% of them will be more than 60 days behind schedule.
Let’s take the case of a drop. Those with an outstanding variable-rate loan will be more than delighted. They will pay less each month. They may even consider paying off their debts more quickly. New borrowers, meanwhile, are more motivated to take out loans. With rates more attractive, they can consider buying a home.
Impact on lenders
Lenders are also affected by changes in interest rates. Let’s take the example of an increase. Their margins become higher on existing loans. New borrowers, on the other hand, are more reticent. This systematically leads to a drop in new loans, which in turn reduces their potential income.
If we were to envisage a reduction, the consequences would be the opposite. Margins on outstanding loans would fall. However, this would be offset by an increase in potential new loans. More households will be interested in taking out loans.
Impact on the economy as a whole
Now, let’s see how this change in rates can affect the economy in general. In the case of a rise, in a normal market, the real estate market can slow down. Households’ reluctance to borrow to buy homes will have a negative impact on many real estate-related sectors:
- Construction
- Sales of building materials
- Real estate services…
Exceptionally, the increase in rates over the past two years has not affected the real estate market as in previous years, since Canada is experiencing significant immigration.
Conversely, a downturn can stimulate the real estate market. Many more households will be taking out mortgages to buy their own homes. However, this could lead to real estate bubbles. Long-term financial risks are to be expected.
Expected changes in Canadian mortgage rates in 2024
The Bank of Canada has decided to maintain its key rate at 5.00%. The reason is simple. The local economy is still just recovering from previous rate hikes. In fact, it takes about 1 year for the increases to be fully felt. Canada has seen 10 successive increases in 21 months.
Canadian households have over 4 million mortgages. 2.2 million will have to be renewed over the next 2 years. Maintaining rates to ensure their renewal is therefore crucial.
According to current forecasts, mortgage rates should remain stable. At least, that’s the plan until mid-2024. A fall is even envisaged, but remains unlikely in the short to medium term.
In any case, one thing is clear. According to the Bank of Canada, just under one in two borrowers saw their mortgage repayments increase. According to this institution, virtually all households with a mortgage will face this increase before the end of 2026.
