Go to Admin » Appearance » Widgets » and move Gabfire Widget: Social into that MastheadOverlay zone
The big Canadian banks increased their fixed-rate mortgages to 5.14 per cent from 4.99 per cent last week, even before the Bank of Canada announced the quarter per cent increase that triggered the rise in variable loan costs.
“The fact is, (people) have been incredibly lucky in terms of mortgage rates for the last eight years,” said Laurence Booth, professor of finance at the University of Toronto’s Rotman School of Management.
He reminds his students of his own experience, which included a variable rate mortgage of 24 per cent in 1981, during a period of volatile interest rates.
Article Continued Below
But Booth said the central bank is moving carefully because, while Canadians seldom default on their mortgages, it doesn’t want to drag down the overall economy by reducing Canadians’ spending on groceries and other consumer goods to meet those home payments.
It put the cost of the quarter of a percentage point increase in the bank rate this week at an additional $ 52 a month or $ 624 per year for someone holding a $ 400,000, 5-year variable rate loan amortized over 25 years.
“It’s only appropriate for a household to take a variable rate if they have a lot of wiggle room in their finances. If the rate moves 3/4 of a point and beyond — let’s say something unforeseen happens and rates rise quicker than anyone is expecting — they should be able to handle that risk,” said Laird, president of Canwise Financial.
“Any household that is tighter for cash — typically the first-time home buyer — we try to influence them towards a fixed rate. Yes, it’s going to cost a little bit more off the bat but we do know they can afford it and that is locked in, usually for five years,” he said.
New stress testing launched by the Office of the Superintendent of Financial Institutions means most borrowers already have to qualify at higher than the posted rates — either the 5-year benchmark rate or 2 per cent above the mortgage rate they qualify for, whichever is higher.
The bank acknowledged that the uncertainty around the North American Free Trade Agreement clouds an otherwise robust economy, including the high employment and economic factors such as high employment and near-target inflation that prompted this week’s increase.