Canadians expect mortgage rates to rise

(September 1, 2004) Clients with mortgages coming up for renewal may soon be seeking your advice. The majority of Canadian homeowners and prospective homebuyers expect mortgage rates to rise over the next 12 months, with the average estimate of a five-year closed mortgage rate hitting 7.2%, according to a survey by CIBC and Decima Research. The current average rate for that term is 6.7%.

Seventy-eight per cent of respondent said it was now time to lock into a fixed-rate mortgage to avoid the rising rates.

“With interest rates expected to head north, the natural instinct is to lock in, but if they are comfortable with the variation, homeowners may be better off over the longer term with a variable-rate mortgage,” said Paul Mims, vice president, CIBC mortgages and lending.

But while 78% said it was time to lock in, only 59% said they expected rates to rise, with 24% expecting rates to remain stable.

Hitting the brakes

Interest rates have been at historical lows since falling to 2% in April, but that could soon change. Many economists believe the Bank of Canada will raise its trend-setting overnight lending rate as early as next week, in an effort to cool off strong economic growth.

In fact, mortgage rates are more closely tied to the 30-year bond yield than the Bank of Canada rate and mortgage rates have fluctuated throughout the past year, despite a stable bank rate — a point you may want to make when discussing the issue with clients.

A bank rate hike was expected before Tuesday’s release of GDP data, which shows the economy growing at an annualized rate of 4.3%. That’s short of the 4.6% rate many analysts were expecting, but still pretty hot, especially when compared to the U.S. growth rate of 2.8%.

“It’s a very reasonable scenario that the bank will raise interest rates, come September,” said Benjamin Tal, senior economist, CIBC World Markets in an interview last week. “The relative softness in the U.S. and the strong Canadian dollar, to me suggests that even if they start moving in September, the overall increase will be fairly limited.”

Demographic shift

The real estate market also appears to be undergoing an interesting demographic shift, according to a report released yesterday by Royal LePage Real Estate Services. As low interest rates have attracted a nearly unprecedented wave of first time buyers, the diversity of these buyers has increased.

In a survey conducted by Maritz Research, Royal LePage found there are currently slightly more female first time buyers than male, with a 51-49 percentage split. This small gap is expected to widen, however, as 55% of women who have never owned a home are considering buying within the next three years. Only 45% of men in the same position are looking at entering the market over the same time horizon.

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“We have seen a marked change in the attitudes of women toward homeownership over the past several years,” said Phil Soper, president and CEO of Royal LePage Real Estate Services. “Traditionally, marriage came before the mortgage, but goals have clearly changed. Women are using their purchasing power to invest in real estate and have little trepidation about doing it alone.”

The survey also found that women were twice as likely as men to forego an expensive wedding reception in favour of a larger down-payment on a home. Only 15% of male respondents said it was “very likely” they would do so, compared to 30% of female respondents.

“First-time buyers today are confident and well-informed as they have more research available to them than ever before,” said Soper. “Buying a home is probably the largest purchase they will ever make, so it is important that they think through their long and short term goals and get professional advice before moving forward.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(09/01/04)