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Mortgage interest rates will rise next year, experts say

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Mortgage interest rates will rise next year, experts say

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Canadians looking to buy a home can expect mortgage rates to rise soon, experts say.

The recent Bank of Canada forecast is a good indication of why, said Don Drummond, an economist at Queen’s University and former chief economist at TD Bank. The Bank of Canada announced on Wednesday that even if its current key rate remains stable at 0.25%, it will likely increase as early as the second quarter of next year.

According to Drummond, mortgage rates should follow suit, especially variable rates.

“Variable rates will go up pretty quickly, they could even rise in anticipation of bank action,” Drummond told in a telephone interview Thursday.

He predicts that the Bank of Canada’s short-term interest rate will increase by about 0.75 percentage point by the end of 2022. Eventually, he predicts the rate will be between 1.75 and 3%. by the end of 2023, which he describes as a more “normal” rate. He expects variable mortgage rates to rise at the same time.

“The variable rate is set on the prime rate of the chartered banks, and the prime rate is set on the key rate of the Bank of Canada, so that the variable rate would increase by the same amount,” he explained. .

Robert Hogue, senior economist at the Royal Bank of Canada, predicts a nearly 0.5 percentage point hike in the central bank’s interest rate by the end of next year, but still predicts a rise in prices. variable mortgage rates.

Fixed rate mortgages are more of a wild card, as they are not affected in the same way by Bank of Canada actions. Yet there are signs that these fixed mortgage rates are also starting to rise.

“Fixed rates have already started to rise, we’ve seen that over the past few months,” Hogue said in a telephone interview with Thursday.

Fixed-rate mortgages are tied to bond yields, Hogue explained, which imply longer-term interest rates, and bond markets will anticipate future moves by central banks. He predicts that the average five-year Government of Canada bond rate will likely increase by 0.5 percentage points as well by the end of 2022.

“We expect the overnight rate to rise, and at the same time, we expect bond yields to continue to climb throughout the year,” he said. “In both cases [fixed and variable rates], these will have upward implications for mortgage rates.

While these increases may worry some homebuyers, Drummond says they are necessary.

“We should want [interest rates] go up, ”he said. “It causes a lot of imbalances, it puts the whole world in massive debt and it will come back to harass us if we do not put an end to it.

“Sadly, people won’t see it because they experienced the lowest rates in history.”

Drummond points to a reality many homebuyers, including his own daughter, are currently facing – bidding wars due to the low supply of homes available on the market. As he moved from Saskatoon to Aylmer, Que., His daughter faced 15 bidders at one point for a property. His fear, he says, is that homes will be bought at a price well above market value in six to 12 months. While house prices still haven’t come down much, Drummond notes some improvements.

“There are still bidding wars, but they are much more isolated than they were during the summer months,” he noted.

Hogue says mortgage rates have fallen to historically low levels, creating a hot housing market. Rising mortgage rates will help calm things down.

“We believe that the housing market, which has already cooled from incredibly strong levels at the start of this year, will continue to cool over time for the remainder of this year and into the next year,” said Hogue.

His advice to new home buyers facing these increases: speak to a specialist first.

“Everyone’s situation is different,” Hogue said. “Everyone has to make an informed decision: take out a loan, own a home, or continue to rent. “

Drummond’s advice is slightly more cautious.

“Try to keep the capital as low as possible … pay back that capital to reduce your exposure,” he said.

When deciding whether to opt for a fixed or a variable formula, Drummond says that historically those who opt for a variable formula have ended up paying less interest during their tenure. But it really depends on the risk appetite, he says.

“If you’re the cool, calculated person who plays the tables in Las Vegas with some success and don’t have a heart attack in the process, stick with a variable rate, but if you’re the type of person who gets the table craps… don’t.

Finally, anticipate that rates will go up.

“There is a generation of young people who are addicted to very low mortgage rates and they have come to believe that is the norm. But this is not the norm. “

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