The Globe and Mail (Prairie Edition) - - NEWS - ROB CAR­RICK rcar­rick@globe­and­

Wor­ried about the loom­ing ef­fects of higher mort­gage rates? We’re start­ing to see them now.

We’res­tart­ing to get a pic­ture of what mort­gage rate in­creases do to house­hold bud­gets.

If you’re buy­ing an av­er­agepriced home in Van­cou­ver, the in­crease in five-year fixed-rate mort­gage costs over the past two months could add up to some­thing like an ex­tra $1,824 a year; in Toronto, you’re look­ing at $1,584. In a small mar­ket such as Saint John, the ex­tra cost would be close to $350.

The big­gest ques­tion in hous­ing to­day is what will hap­pen when mort­gage rates rise from the his­toric lows they’ve been at in re­cent years. We saw the very be­gin­ning of this in the fi­nal months of 2016 and the re­sults are sig­nif­i­cant.

» The mort­gage mar­ket is so frag­mented to­day that it’s tough to doc­u­ment what’s hap­pen­ing with rates. There are deep dis­count lenders you ac­cess through mort­gage bro­kers, plus al­ter­na­tive banks, trust com­pa­nies and credit unions that dis­count ag­gres­sively and big banks that have all kinds of dif­fer­ent rates – posted and dis­counted rates, plus the rates they ne­go­ti­ate with clients who hag­gle.

So let’s look at av­er­ages. Data from show that on Nov. 8, the day of the U.S. elec­tion, the av­er­age rate on dis­counted five-year fixed rate mort­gages for bor­row­ers with a down pay­ment of less than 20 per cent was 2.34 per cent. Ear­lier this week, the av­er­age was 0.37 of a per­cent­age point higher at 2.71 per cent.

Sur­pris­ingly, the rise is a bit sharper for peo­ple who come up with a 20-per-cent down pay­ment and thus don’t have to pay the pre­mium for mort­gage de­fault in­sur­ance. Here, RateSpy data show the av­er­age rate has climbed to 2.87 per cent from 2.44 per cent, a dif­fer­ence of 0.43 per cent.

Mort­gage rates have risen for a cou­ple of rea­sons, the first be­ing a se­ries of mea­sures in­tro­duced by the fed­eral govern­ment in an at­tempt to cool down the hous­ing mar­ket. These mea­sures ei­ther make it more dif­fi­cult for bor­row­ers to qual­ify for a mort­gage, or they add to costs that are in­curred by lenders and passed along to cus­tomers.

One of the quirks of these new reg­u­la­tions is that they have re­sulted in some lenders of­fer­ing slightly lower rates to peo­ple who have a down pay­ment of less than 20 per cent than they do for bor­row­ers at or above that thresh­old.

An­other re­sult of the new rules is that it’s more ex­pen­sive to re­fi­nance a mort­gage, which can mean adding new bor­row­ing to the loan or ex­tend­ing the amor­ti­za­tion pe­riod. RateSpy’s data show the av­er­age rate for a re­fi­nanc­ing has risen 0.5 of a per­cent­age point since Nov. 8.

The other fac­tor in higher mort­gage costs is that rates in the bond mar­ket have moved up on the be­lief that U.S. pres­i­den­t­elect Don­ald Trump will in­tro- duce eco­nomic poli­cies that in­crease both growth and in­fla­tion. The rate on five-year govern­ment of Canada bonds has a huge in­flu­ence on fiveyear fixed rate mort­gages. RateSpy’s data show that five-year govern­ment bond yields in­creased 0.35 of a point be­tween Nov. 8 and Jan. 9.

If you’re re­new­ing a ma­tur­ing five-year mort­gage in 2017, com­pare your rate with what’s avail­able to­day. It’s quite likely you’ll still be able to re­new at a lower rate, even af­ter the rise in mort­gage costs of the past two months. In early 2012, a well dis­counted five-year fixed rate mort­gage might have come with a rate of 2.99 per cent.

First-time buy­ers are hit the hard­est by the re­cent mort­gage rate in­crease, no­tably in big­ger cities. A cou­ple that buys a house in Toronto at the Novem­ber av­er­age price of $776,684 might be look­ing at an ex­tra $132 a month, or $7,920 over five years. The in­crease in Saint John seems mi­nor on an an­nual ba­sis, but it does add up to more than $1,700 over five years.

We’ve seen mort­gage rates move higher in the past few years, and then pull back to new lows be­cause of lin­ger­ing eco­nomic weak­ness. This could hap­pen again, but it seems un­likely. Strong job cre­ation num­bers for De­cem­ber sug­gest a firm­ing econ­omy here in Canada, and then there’s the Trump fac­tor in the United States.

The rise of house prices in the past eight years is more than any­thing else a re­sult of sus­tained low in­ter­est rates. We’ve just had a taste of what higher rates mean to af­ford­abil­ity.

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