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Variable-rate borrowers will see their interest cost on their next mortgage payment rise as banks and other financial institutions have lifted their prime rates to a 22-year high of 6.95%.

Prime rate, which is used to price variable-rate mortgages and personal and home equity lines of credit (HELOCs), generally takes its cue from movements of the Bank of Canada’s overnight target rate, which the Bank hiked by 25 basis points on Wednesday.

The increase translates into roughly $15 per month for every $100,000 worth of mortgage debt for variable-rate mortgage holders.

For a recent first-time buyer, that works out to an extra $60.90 per month in interest, based on Equifax Canada data that shows the average new mortgage balance for a first-time buyer is now $405,900.

Additional hike(s) expected

The Bank of Canada caught markets partially off guard this week with its quarter-point rate hike. In a speech yesterday, BoC Deputy Governor Paul Beaudry said the Bank determined further tightening was needed due to the “persistent” excess demand in the economy and the risk it poses to inflation remaining elevated.

That has caused markets to re-adjust future rate expectations, with additional hikes now priced in for July and September.

“The BoC is back in hiking mode. Economic data are pointing to more strength and the Bank has yet to see any sign from the labour market that the economy is turning,” wrote James Orlando of TD Economics. “We expect the BoC to hike again in July, bringing the policy rate to 5%.”

Scotiabank economist Derek Holt, who was among the first to forecast the Bank’s June rate hike, said the BoC statement suggests a follow-up rate increase at the Bank’s July 12 meeting will be heavily dependent on the data between now and then.

“My reading of the statement leaves the door open to doing another 25bps in July, but it’s going to be a data-dependent call,” he wrote.

But should economic data in the weeks ahead come in soft, like May employment data released today that showed a loss of 17,000 jobs in the month and a rise in Canada’s unemployment rate to 5.2%, markets could once again re-assess expectations.

“I think if we see June employment numbers like May’s, [rate-hike expectations] will be re-priced quick,” Ryan Sims, a TMG The Mortgage Group broker and former investment banker, told CMT. “Today’s jobs report was a bomb, and the revisions to prior months prove that all is not well.”

The impact on fixed-rate borrowers

The evolving rate forecasts are also impacting fixed mortgage rates by way of bond yields, which typically lead fixed-rate pricing.

With renewed expectations of an additional Bank of Canada rate hike or two, bond prices plunged, causing yields to surge to a 15-year high. That, in turn, is expected to lead to a fresh round of fixed mortgage rate increases.

This would come on the heels of a steady rise in fixed rates over the past several weeks.

The increases are impacting new buyers as well as existing borrowers who are facing a mortgage renewal.

The Bank of Canada’s own data suggests some mortgage holders are likely to face payment increases of up to 40% at renewal. The Bank says about one-third of mortgages have already seen increases in payments compared to February 2022, prior to the Bank’s latest rate-hike cycle, and that all mortgage holders will have experienced a payment increase by the end of 2026.

Relief by way of anticipated Bank of Canada rate cuts keeps being pushed further down the road. Markets now don’t anticipate the first rate cuts until mid-year 2024.

“Once the market truly believes that the Bank of Canada is going to pivot to a [rate] cut cycle, then you’re going to see 5-year yields break that glass floor that they’ve had for many months now,” Rob McLister, editor of MortgageLogic.news, said during an interview on the Angry Mortgage podcast this week.

However, predicting when that will happen is the challenge, he said, noting that markets had already fully anticipated rate cuts by as early as this summer.

“We saw 100% cut-pricing already reflected in the market, and that changed radically…so, it could change again.”

Source: Canadian Mortgage Trends