Central bankers and economists are practically shouting a warning of much higher mortgage and HELOC rates


The rate outlook is like a weather app that starts flashing red because of the bad conditions ahead.

Last month, Bank of Canada officials warned that the expected cycle of rate hikes could be larger and could come sooner than expected, while the Federal Reserve Chair said “inflation is way too high” and spoke of moving. briskly” to tame it. Unambiguous statements like these from central bankers are unusual.

How much could interest rates rise? CIBC Economics said in a report released this week that the Bank of Canada’s overnight interest rate could rise by as much as 2.25 percent to 2.5 percent from just 0.5 percent today. The next rate hike could come on April 13 – don’t be surprised if the hike is 0.5 percentage point, double March’s rate.

All these reasons why interest rates won’t or can’t rise much? It’s time to park them. What we need to focus on now is how much additional weight borrowers will have to carry for mortgages, lines of credit and other adjustable-rate debt.

With Canada’s high level of household debt, there is no question that the Bank of Canada needs to exercise caution in raising interest rates. The bank must also be careful not to plunge the economy into a recession with overly aggressive rate hikes.

But controlling inflation is non-negotiable for central bankers, and inflation is running hot. The most recent year-on-year increase in the cost of living was 5.7 percent, which compares to the Bank of Canada’s target range of 1 to 3 percent.

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Discussions about higher interest rates sometimes overlook people who have drawn down their home equity lines of credit. According to credit monitoring firm Equifax Canada, the average HELOC balance at the end of last year was $52,000 and the average credit limit for new HELOCs was $189,000.

HELOC borrowing costs are linked to a lender’s base rate, which in turn tracks the overnight rate. The prime is currently at 2.70 percent – the number of primes is close to 5 percent if the CIBC forecast for the overnight rate is correct.

The minimum monthly payment required for a HELOC is usually just the interest amount. To find out how much your minimum payments will cost you if interest rates rise by different amounts, try an online credit line calculator available from your lender or a competitor.

A bank’s calculator shows a monthly interest payment of $138.67 on a balance of $52,000 at 3.2 percent, which is a prime plus a usual 0.5 point markup. At 5.5 percent, the monthly minimum rises to $238.33.

Even more important is to model your potentially higher mortgage costs with an online calculator. There are dozens of these calculators – I like the one offered by Ratehub.approx because it makes it easy to compare different monthly costs with different installments and amortizations. You can extend your payback on renewal to reduce your payments.

In a note to clients this week, BMO Capital Markets announced that “mortgage rates are going straight”. According to BMO, five-year fixed rates have already risen to 3.5 percent, while floating rates should rise above 3 percent by midsummer.

The Ratehub calculator shows that if your mortgage balance is $500,000 at renewal time and amortized over 20 years, your monthly payments would be $2,893 at a fixed rate of 3.5 percent, $3,021 at 4 percent, and $3,152 at 4.5 percent would . If you’re interested in a more extreme outlook, the monthly payment is $3,286 at 5 percent.

Concessionary interest rates for five-year fixed-rate mortgages were in the 2.6 percent range in mid-2017. So prepare for much higher borrowing costs if you have a five-year extension mortgage this year and still like the fixed-rate option.

After April 13, the next dates in 2022 when the Bank of Canada has the opportunity to hike rates are June 1, July 13, September 7, October 26 and December 7. We’re well past the point where these days pass uneventfully. Borrowers, high inflation means rate outlook is flashing red.

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