Rising Mortgage Rates: How Should You Plan Home Buying?

The short supply of homes was already a concerning matter for buyers planning to buy their first home under the current low-interest rates plans. And now, the rising mortgage rates could dry up the market for buyers.

According to Reuters, "Canadian mortgage rates are beginning to inch higher for the first time since before the COVID-19 crisis, reflecting the spike in long-term bond yields." However, the increase in home loans is still at a minimum level.

No matter how small the increase is, it's a signal for homebuyers that mortgage rates could rise even more, which calls for a swift move towards buying a home before the mortgage rates get out of range.

Why Are Mortgage Rates Rising?

Mortgage rates are usually affected by yield or interest rates on Canadian five-year government bonds. If this rate goes up, so will the mortgage rate. During 2020, yield plunged to 0.32%, which recently got nearly three times higher.

The decline in yield last year made investors retract their investment and deposit in the more-promising stocks. The aftereffects of this withdrawal started causing a fall in bond prices while yields to go up.

According to Financial Post, following the hike in bond yields, financial giants like TD Bank and the National Bank of Canada have increased mortgage rates on some mortgage products. The surge ranges between 15 to 25 basis points; a basis point is one-hundredth of 1% point.

However, the Royal Bank of Canada has not raised mortgage rates, and the Bank of Canada (BoC) also planned not to increase the rates, at least until the economy and employment are back on their feet.

Should You Buy a House Now or Wait?

Though the central bank has indicated that it has no plans to increase the rate, it's an early indication that interest rates would increase eventually. Responding to the recent announcement by the bank, James Laird, President Ratehub, said:

I don't know whether they're going to be able to keep rates here for a full two years,

Something similar came from Sherry Cooper, the chief economist at Dominion Lending Centres, "An ultimate rise in interest rates cannot be far off."

Even if the central bank keeps its promise for the next two years and does not increase its rates, home prices would continue to rise, making it relatively difficult to buy a home after two years.

Choosing Between Fixed and Variable Mortgage Rates

A fixed-mortgage rate will stay the same throughout the mortgage term, which means if you apply for a mortgage now (in a relatively low market) for a fixed-five term basis (the most common among 80% of the Canadians), your mortgage rate will remain the same till the expiry of the mortgage term even if the central banks increase the rates.

On the other hand, a variable mortgage rate is one where you expect a change in rates through the mortgage term, which means if you apply for a mortgage term, knowing that the mortgage has started increasing, your mortgage rate would also go up.

Bottom Line

Since the COVID-19 pandemic, the real estate market has been giving some strange results. Previously, the housing market in Q2 of 2020 dived drastically when the market is usually at its peak. And later that year (in Q3 & Q4), the results were surprisingly favourable when home prices surged at a massive pace.

These real estate trends are more inclined towards buying a home now while you can. The only challenge that remains is to find the best home in this low-inventory market. We have prepared a guide to help you buy a home in a low-inventory housing market.

For more support from professional realtors, feel free to contact us.