Photo: James Bombales
Last week, Canada’s major banks reported that they expected their mortgage applications to be cut by 50 per cent in the second half of 2018. That’s because a new mortgage stress test and a rising interest rate environment are making it increasingly difficult for would-be homebuyers to qualify for a mortgage.
Now, a recent report from Capital Economics has found that mortgage credit hasn’t been this low since 2001.
“Rising interest rates and the recent tightening of mortgage lending standards are now having a marked impact on mortgage lending, with the three-month-on-three-month annualised growth rate of mortgage credit falling to a 17-year low in April,” reads the report.
What does that mean for the Canadian economy? The more homeowners are spending on their mortgage payments, the less they’ll be able to put towards consumer spending, which has been a major boon to the economy for years.
“Higher long-term interest rates will continue to hold back consumption and possibly business investment too,” reads the report.
After years of historically low interest rates, the Bank of Canada has beens steadily hiking the overnight rate since last spring. It currently sits at 1.25 per cent, and is widely expected to rise again before the end of the year.
According to a recent note from BMO senior economist Robert Kavcic, rising interest rates (and with them mortgage rates) could take a serious cut out of Canadian homeowners wallets in the next year.
“If five-year fixed rates just hold steady at current levels (around 3.3 per cent), those with mortgage coming due in 2019-20 could be looking at a 50-basis point increase,” he writes. “If rates gradually rise to 4 per cent, the reset impact will top one percentage point (ie. north of $200/month if you took out a $500,000 mortgage in 2014.)”