Article content

Wednesday’s Bank of Canada announcement revealed policymakers may be more hike-prone than markets had assumed.

Sign In or Create an Account

or View more offersArticle content

Bond traders noticed the hawkish tilt instantly and priced a pre-Christmas hike as nearly a done deal.

Article contentWe apologize, but this video has failed to load.Try refreshing your browser, or
tap here to see other videos from our team.We apologize, but this video has failed to load.Try refreshing your browser, or
tap here to see other videos from our team.Article content

And forward rate data from CanDeal DNA implies four more hikes after that, 125 basis points of tightening in total.

Article content

Needless to say, people eyeing a new mortgage would love to know how much potential hikes could cost them.

Article content

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

And according to August data from Dominion Lending Centres Group, the nation’s largest mortgage originator and a company I’m affiliated with, over 56 per cent of their prime borrowers picked a variable anyway.

Article contentArticle content

To size up that risk, picture a Canadian household that has the average:

Article content

  • Mortgage balance of $293,270 (source: TransUnion)
  • Remaining amortization of 19 years (the approximate industry average)
  • Dual-earner full-time wages of $165,000 (source: StatCan weekly earnings)
  • Non-mortgage debt load of $28,118 (source: TransUnion)
  • Floating-rate discount of prime minus 0.80 per cent (which is 3.65 per cent today)
  • Monthly mortgage payment of roughly $1,781

Article content

That payment eats just 13 per cent of this “average” borrower’s gross income.

Article content

Hardly a crisis.

Article content

Even if the Bank of Canada hiked the full 125 basis points the market is pricing in, someone with an adjustable-rate mortgage (ARMs) — the kind where payments rise when the prime rate rises — would see their payment climb to just $1,963.

Article content

This would drain an extra $2,184 from their annual budget, though wages have climbed about 3.50 per cent annually over the last decade — $5,775 on that $165,000.

Article content

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

So, net-net, the average borrower survives.

Article contentRead More

  1. The best mortgage rates in Canada right now
  2. The best reverse mortgage rates in Canada right now
  3. Story continues belowThis advertisement has not loaded yet, but your article continues below.

Article content

But here are four situations where policy tightening becomes a real problem:

Article content

#1 — If we see several more hikes than expected

Article content

It’s possible that any hiking cycle proves mercifully short.

Article content

The oil shock won’t last for years, with Iran’s economy on the brink of collapse; sanity may return to the White House in 2029 and AI should prove disinflationary in the end.

Article content

Nonetheless, the future is murky, and the average tightening cycle has entailed roughly 11 quarter-point hikes, or 275 basis points (as measured during the inflation-targeting era).

Article content

A 275-point climb drives up that payment 24 per cent, easily outpacing average wage growth.

Article content

And in this author’s view, that’s the minimum a rate floater should brace for in a potential rate hike cycle.

Article content

#2 — If you overbuy

Article content

If our theoretical couple maxes out their buying power, their $165,000 of income and $28,118 in non-mortgage debt support a $757,485 mortgage, including the default insurance premium.

Article content

And note that 52 per cent of buyers paid the maximum they could afford, according to the latest Canada Mortgage and Housing Corporation data.