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It looks like after years of near-record-low interest rates, Canadians are getting a little too used to easy money. And that could spell “financial headache” for those homeowners unprepared for the coming spike in interest rates.

That interest rate shock may come sooner than most Canadians think. According to a recent report, 31% of Canadians expect interest rates to stay the same over the next five years.1

The Organisation for Economic Co-operation and Development, on the other hand, says the Bank of Canada will probably begin raising the overnight lending rate—which tracks and impacts variable mortgage rates—in the second half of 2014.2

While that timeline might seem like it’s on the distant horizon, it’s important for homeowners to be prepared for the eventual rise in interest rates. While the Bank of Canada has not yet raised the overnight lending rate, it did say the long-term goal is still a “gradual normalization.”

What this means to first-time home buyers or those with mortgages coming up for renewal is that the cost of borrowing is going to gradually increase. Don’t let the word “gradually” fool you; it can add up, and fast!

As a result, buyers should factor this increase into the equation when planning their purchase. In May 2013, Canada’s five big banks were selling five-year closed mortgages near 2.99%; today, its 3.59%. Those 60 basis points translate into higher monthly payments and interest.

For example, back in May 2013, a $500,000 mortgage with a maximum 25-year amortization period at three percent would translate into a monthly payment of $2,366.23. Over five years, $69,346.66 would be paid out in interest.

At 3.59%, that same mortgage now means home buyers are paying out $2,520.16 per month, and over five years, $83,311.64 is paid out in interest. What happens if interest rates rise to five percent? That $500,000 mortgage now costs $2,908.02 per month, with $117,008.94 paid out in interest.

It’s inevitable that interest rates will rise; the big question is, will Canadians be able to handle the higher interest rates? With the awaited rise in interest rates not expected to occur until late 2014, now is the perfect time for first-time home buyers and those up for renewal to “stress test” their mortgage against a higher interest rate and see if they can afford it over the long term.

The experts at Canadalend.com also think it’s a good idea to consider a mortgage with a shorter amortization period. While the monthly payments are higher, the homeowner is mortgage-free sooner and pays out less in interest. A $500,000 mortgage with a five percent interest rate amortized over 20 years means paying $3,258.63 per month, with $114,018.00 going to interest.

First-time home buyers ready to take the first step on the property ladder can get a head start by getting pre-approved for a mortgage. Pre-approval lasts for 120 days and is locked in from the day you start the process. With interest rates rising, Canadalend.com warns that getting pre-approved now could save home buyers thousands of dollars in interest charges.

Whether you’re a home buyer or looking to refinance, a licensed Canadalend.com agent will research all of the major banks and lending institutions to ensure you get the mortgage best suited to meet your financial goals.

Sources:

1. “First-Time Home Buyer’s Report: One-Third Expect Interest Rates to Remain the Same Over the Next Five Years,” Bank of Montreal web site, July 4, 2013; http://newsroom.bmo.com/press-releases/bmo-first-time-home-buyer-s-report-one-third-expe-tsx-bmo-201307040884671001 .

2. Mayeda, A., “Look for rate hikes in late 2014, OECD tells Canada,” Financial Post May 31, 2013; http://business.financialpost.com/2013/05/29/oecd-canada-outlook/.

Cheap money and an era of near-record low interest rates could soon be coming to an end. For first-time home buyers, this means the window of opportunity for locking in a mortgage at reasonable rates is beginning to close.

And it’s been a long time coming. Government interest rates in Canada and the United States have been exceedingly low since the worst of the financial crisis. In fact, over the last three years, government bond yields have been in a free fall. In May, the five-year Government of Canada bond yield dropped below 1.2%.

A lot has changed in the last few months.

While bond yields were expected to climb, their rapid rise has been a lot quicker than anyone had anticipated. Since the beginning of May, the five-year government bond yield has climbed from 1.15% to 1.76%. Over the same period of time, the 10-year Government of Canada bond yield has climbed from 1.68% to 2.48%. Yields on the 30-year bond crossed the 3.5% mark, the highest level since October 2011.

It’s important to be aware of bond yields, because they have a direct impact on virtually every corner of the economy, from residential mortgage rates to pensions. The sudden increase in bond yields—the return you get on a bond—has caught many Canadians off guard; in the past month alone, the Royal Bank of Canada has raised mortgage rates twice.

Because the Canadian economy is inexorably linked to the U.S. economy, it’s essential that first-time home buyers also be aware of U.S. bond prices. Since the beginning of May, the yield on 10-year U.S. Treasuries has jumped from about 1.9% to 2.5%, their highest rate since August 2011.

Longer-term bond yields have been on the rise over the last few months, on the heels of encouraging economic conditions in the U.S. Recent data shows that second-quarter U.S. gross domestic product came in at a robust 1.7%, beating projections of 1.1%.

The stronger results means the U.S. Federal Reserve could start to wind down its $85.0-billion-per-month bond-buying program this fall. The Federal Reserve initiated its bond-buying program back in 2008, in an effort to kick-start the American economy out of the Great Recession. The Bank of Canada is expected to raise interest rates in 2014.

After hovering near record lows for years, how high are bond yields and mortgage rates expected to go? Some economists expect to see the U.S. 10-year Treasury yield hitting between five and six percent within the next two years.

At Canadalend.com, it’s our opinion that, on the backs of an improving North American economy, interest rates in Canada and the United States have begun their ascent. And, with many economists expecting the second half of the year to be even stronger, interest rates could surprise many by moving significantly higher.

While the Bank of Canada has said it doesn’t expect to raise its lending rates until 2014, this doesn’t mean Canadian banks won’t raise their long-term mortgage rates beforehand. In fact, it appears they have already begun to do so.

With bond yields and mortgage rates on the rise, now is the perfect time for first-time home buyers or those looking to refinance to contact their local Canadalend.com agent and get their long-term mortgage pre-approved.

Source:
Shmuel, J., “It’s a bear market for bonds ahead: CIBC,” National Post July 30, 2013; http://business.financialpost.com/2013/07/30/its-a-bear-market-for-bonds-ahead-cibc/.

Record-low fixed mortgage rates can’t last forever, and today’s big banks are living proof.

In November 2008, the monthly average rate for a conventional five-year mortgage in Canada was seven percent. Since the 2008 market crash, Canadians have become accustomed to artificially low mortgage rates. In fact, it’s almost unprecedented; since 2010, the Bank of Canada has kept its key overnight lending rate at one percent—the longest period of unchanged rates in more than 50 years.

While the Bank of Canada has said it probably won’t raise its overnight lending rate until late in 2014, that doesn’t mean banks are going to sit back and wait. In fact, banks can raise longer-term mortgage rates well ahead of any action the Bank of Canada might make—and they are.

Back in May 2013, Canada’s five big banks were selling five-year fixed mortgages below 2.99%. On June 10, RBC made the first move, raising its rate to 3.29%. One month later, and it’s at 3.69%. Over the last two months, RBC’s rate has jumped almost 25%.

Granted, even though fixed mortgage rates are on the rise, they are still well below 2008 levels. That doesn’t mean first-time home buyers or those looking to refinance their mortgages should take a leisurely approach and wait. Doing so could be a costly mistake.

Today’s fixed interest rates are on the rise not because the Bank of Canada is hinting it will increase interest rates; they’re on the rise because of regular economic factors. When the Bank of Canada does implement a rate hike, most Canadians will be in for quite a shock. With that in mind, it’s an excellent time for those looking to buy a home to lock into a fixed mortgage rate.

At Canadalend.com, we think it’s important for first-time home buyers, or those looking to refinance at more favourable terms, to take advantage of today’s still-low interest rate climate.

But you can’t trust Canada’s big banks to look out for your best interests when it comes to getting a first-time mortgage. After all, it’s their goal to sell you one of their lending products, whether it’s in your best interests or not.

That could mean locking into an unfavourable term with high interest rates. And that can translate into additional interest charges in the tens of thousands of dollars.

As of July 15, 2013, the average monthly rate for a five-year fixed mortgage at Canada’s five big banks is 4.22%. CIBC is highest at 5.14%, while BMO is “lowest” at 3.59%. Fortunately, Canada’s biggest banks do not have a monopoly on lending products. Caisse Financial Group’s five-year fixed mortgage rate is 2.99%; that’s 41% less than CIBC and 16% below BMO. It pays to shop around—or at least have a brokerage like Canadalend.com do it for you.

Because Canadalend.com agents are licensed and independent, they can draw from all lenders who provide mortgage products, saving you time and money.

While Canada’s mortgage wars may be coming to an end, you can trust a Canadalend.com agent to help you find one that best suits your lifestyle needs.

After five years of historically low interest rates, Canadians are beginning to realize the low-interest-rate party is about to end. In 2007, Canadian interest rates fell to near-historic lows after the U.S. housing bubble burst. Now that the North American economy is regaining its health, interest rates are starting to rebound.

For example, in May 2007, a five-year Government of Canada benchmark bond yielded 4.53%. Since then, government interest rates in Canada have been dropping lower; by May 2011, the yield had fallen to 2.4%, in May 2012, 1.31%, and in May 2013, it dipped below 1.2%.1

But, Canadalend.com warns, Canadian homeowners shouldn’t get used to these historic lows. In fact, over the last few weeks, interest rates have turned a corner and are now rising at their quickest pace in years.

On Friday, June 21, 2013, a five-year Government of Canada benchmark bond returned 1.81%. That means that since this past May, the yield on a five-year Government of Canada benchmark bond has climbed 50%! Additionally, since May, the seven-year Government of Canada benchmark bond has increased more than 50%. While a 10-year Government of Canada benchmark bond has also increased approximately 50%.2

It’s important to be aware of the Government of Canada benchmark bond yields because they are the rates at which retail banks borrow money from each other and form the basis for saving and lending rates that get passed on to customers.

Why the sharp increase? On June 7, Statistics Canada showed that the Canadian economy had added 95,000 new jobs in May—a number much higher than previously forecasted. That high number is a strong sign that the Canadian economy is doing well.3

But perhaps most significant, on May 22, the U.S. Federal Reserve hinted that it was going to begin tapering off its $85.0 billion per month quantitative easing (bond buying) program. Furthermore, the Federal Reserve said it might end the stimulus program altogether in 2014.

As soon as the largest economy in the world—the U.S.—announces it is improving, interest rates in Canada will to start to tick higher, Canadalend.com observes. If this last month is any indicator, the rates could begin rising more quickly than many Canadians expect, which might negatively impact unprepared Canadian borrowers.

What that means is that anyone with a variable rate loan will have to pay more each month—stretching already strained budgets. For example, if you have a $100,000 mortgage, every one percent increase in interest rates translates into an annual increase of $1,000.

Today, most of the big banks charge prime plus one percent for a five-year variable rate mortgage; for example, with prime at three percent, that would mean you pay four percent. So, with the economy improving, banks are going to start charging more to borrow.

How high will interest rates go? Back in the fall of 2007, just before the U.S. housing bubble popped, the prime rate in Canada was around 6.25%. That means that a variable mortgage rate cost the average Canadian 7.25% to carry—81% more than today.

Besides up, where does Canadalend.com see interest rates heading? Over the short term, it wouldn’t be a surprise to see them return to their pre-recession highs from earlier in 2007.

To avoid paying the higher interest rates that are on the horizon, first-time homeowners and those looking to refinance should consider contacting their local Canadalend.com agent and seeing about locking in a longer term mortgage now.

At Canadalend.com, our experience has taught us that, when it comes to picking a mortgage, it’s better to be proactive than reactive—do whatever you can to save your money from rebounding interest rates. Whether you need a big or small mortgage, want it to be fixed or variable, Canadalend.com’s independent, licenced agents can help navigate the often confusing world of mortgages.

In fact, because Canadalend.com agents are independent, they are able to work with all the major banks and lending institutions to help you pick the financial products that best suit your budgetary needs. Our agents will also try to get you approved in 24 hours.

At Canadalend.com, we want to help you achieve your financial goals—both now and in the future. Take advantage of lower interest rates while you still can, and contact your nearest licenced, independent Canadalend.com agent.

Sources:

1. 1. “Canadian bond yields: 10-year lookup,” Bank of Canada web site, last accessed June 25, 2013,http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-yields/ .

• “Government of Canada marketable bonds – average yield – 1 to 3 year,” Bank of Canada web site, last accessed June 25, 2013, http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/ .
• “Labour Force Survey, May 2013,” Statistics Canada press release, June 7, 2013, http://www.statcan.gc.ca/daily-quotidien/130607/dq130607a-eng.htm.