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Inflation may be cooling, but the burden of high interest rates is still weighing on homeowners
Published on October 27, 2023 • Last updated 4 hours ago • 3 minutes reading time
The potential for higher and longer-term interest rates is particularly great for those facing a mortgage renewal in the near future. Photo by Cole Burston/Bloomberg
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Inflation may be cooling, but the burden of high interest rates still falls on homeowners.
That’s one of the warnings from economists and personal finance experts after the Bank of Canada decided on Oct. 25 to keep its key interest rate steady at five percent.
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Mortgage rates in Canada are closely tied to the central bank’s key interest rate, and a benchmark rate of five percent means borrowing costs remain elevated compared to recent norms.
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The potential for higher and longer-term interest rates is particularly strong for those facing a mortgage renewal in the near future – a cohort that is particularly vulnerable, according to a recent survey by Royal LePage Real Estate Services Ltd. includes more than 3.4 million Canadians.
Christopher Alexander, president of real estate firm Remax LLC, said he believes some homeowners renovating their homes will face difficult decisions about their primary residence.
“I believe that people extending their term may be forced to make a difficult decision about selling their home unless they have made significant down payments on their principal or have saved money to apply to their principal can,” said Alexander.
On the positive side, however, years of low interest rates have given homeowners the opportunity to repay a significant portion of the principal on their mortgages, helping to avert the “catastrophe scenario” of mass defaults and a collapse in prices.
Clay Jarvis, a writer at personal finance website NerdWallet, said that while the Bank of Canada’s decision would give adjustable-rate mortgage borrowers certainty about their payments over the next few weeks, the prospect of lower interest rates is not imminent.
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“That means another few months of homeowners trying to budget in a way that will stifle their mortgage payments,” he said.
The central bank’s decision to maintain its key interest rate comes amid a cooling trend in inflation, which has been a key concern in recent months. Canada’s inflation rate fell to 3.8 per cent in September, down from four per cent in August.
“In Canada, there is increasing evidence that past interest rate increases are dampening economic activity and reducing price pressures. Consumption was subdued, demand for housing, consumer goods and many services fell,” the Governing Council said in its Oct. 25 statement.
Toronto-Dominion Bank economist Rishi Sondhi highlighted the importance of shifting market equilibrium in a recent note to clients.
“Lower sales were accompanied by a significant increase in new listings,” Sondhi said. “In fact, the ratio of sales to new listings in Canada fell from nearly 70 percent (indicating very tight conditions) in April to 51 percent (the softer side of what is considered balanced) in September. The latter marked the lowest level of the quota since July last year.”
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Alex Leduc, chief executive of digital mortgage brokerage Perch, said that while it generally takes 12 to 18 months for the full effect of a rate hike to be felt on the economy, the central bank appears to be close to raising rates.
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“The hard work on slowing the economy is over,” Leduc said in an email. “With wage inflation at record levels over the last five years, many people will be able to absorb the higher mortgage costs, and those who can’t will have the option to extend their repayment to make it all work.”
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