This is why rising interest rate hikes won’t crash the Toronto real estate market
In February, Canadian consumer prices increased 5.7% year over year, up from a 5.1% gain in January. This was the largest gain since August 1991. It’s no question that the Bank of Canada will be raising interest rates. The first rate hike was on March 2, 2022, where the overnight lending rate increased to 0.50% (up from 0.25%), and there will be more to come. Scotiabank has predicted that rates are going to rise 7 times in 2022, to 2.0%.
Here's why I don't think the impact is actually all that big.
For every $100,000 in mortgage that you have, your payments will increase by only around $12 (on either 25 or 30 year amortizations). So far that isn't a big deal for most people, but this isn't the reason why it's not going to crash the market.
The reason is that all the big banks have mortgage payments that are fixed and will stay the same when rates go up. Double check your own variable mortgage payment to make sure that your payments are capped.
What this means is that you will just end up paying less towards principal (P) payments to pay off your mortgage, and more towards interest (I). In other words, it will take you longer to pay it off.
As long as the monthly P+I payments no longer cover the interest charged on the mortgage, then you won’t hit the bank’s “trigger rate”. Once the interest payments exceed what you are currently paying, then you will be required to increase your monthly payment, make a prepayment, or pay off the balance of the mortgage.
So, if interest rates increase, you can see how people that already have capped variable rate mortgages won’t get affected. The statistic I hear is that over half of the variable rate mortgages in Canada are capped. Furthermore, the rate hikes won't increase new mortgage origination payments by all that much, as you can see in the example above.
If you are concerned about rising rates, ask your lender if they offer:
an interest rate cap: a maximum interest rate your lender can charge on a mortgage. You never have to pay more in interest than the maximum cap, even if the interest rates rise
a convertibility feature: where, at any time during your term, you can convert or change your mortgage to a fixed interest rate
All the big banks in Canada fix the variable mortgage rate payments, by default. Don't believe me? Check it out.
TD: "With a variable interest rate, the interest rate can fluctuate. At TD, your principal and interest payments will stay the same for the term, but if the TD Mortgage Prime Rate goes down, more of your payment will go towards the principal. If the TD Mortgage Prime Rate goes up, more will go towards interest."
RBC: "Fixed Payments for the Mortgage Term. Your monthly payment remains fixed even if interest rates rise, as long as the amount is sufficient to cover the interest cost."
CIBC: "While your regular payment will remain constant, your interest rate may change based on market conditions."
Scotiabank: "Fixed Payments. Calculated using the Cap Rate and will not change for the full term of your mortgage."
BMO: “With a variable-rate mortgage, the mortgage rate will change with the bank’s prime lending rate. In this case, your scheduled payments will remain the same, but the amount paid towards your principal will vary.”
What this doesn’t cover though is buyer sentiment. Of course, as interest rates rise, everyone starts thinking that the sky is falling and feeling that the real estate bubble is going to burst and they pause buying. If you look at the math though, you can see that this is not true and logically shouldn’t affect anything, but common sense isn't always all that common.