Canadian mortgage costs are rising and renting may make more sense: First National
Canadian real estate is changing rapidly as inflation pushes bond yields much higher. First National, one of Canada’s largest non-bank mortgage lenders, warned that rates were skyrocketing. Neil Silverberg, senior analyst at the lender, has written to clients to explain how quickly yields have risen and how this will affect ownership. More Canadians are expected to stay put or consider short-term rentals as the market adjusts.
Mortgage bond yields have climbed more than a basis point a day in 2022
Canadian mortgage yields are rising very rapidly. To underline this point, First National explains that only 139 days have passed this year. Yields on the 5- and 10-year GC and Canada Mortgage Bonds (CMBs) rose more than 1 basis point per day, on average. Silverberg doesn’t see returns continuing at this breakneck speed, but sees more room for growth.
Rising bond yields drive mortgage rates much higher
Soaring bond yields have driven residential mortgages much higher in 2022. According to the lender, a conventional 5-year mortgage has gone from 2.94% at the start of the year to 4.84% currently. “That’s an increase of nearly 200 basis points in less than 5 months,” Silverberg explained.
This represents a significant increase for borrowers who could be stretched. “If you had a mortgage totaling $1 million with a regular amortization period of 25 years, monthly payments would have gone from $4,702 to $5,726 within months,” he said.
Higher mortgage payments will increase the incentive to consider renting
Higher mortgage payments will increase the incentive to consider renting a property. As rates rise to unstimulated levels, borrowers will pay more interest. This reduces the loan principal amount and allocates more to interest charges. Increasing the amount of payments and interest charges will create more incentives to rent.
Higher lending rates tend to lower house prices, but this takes a period of adjustment. Meanwhile, if house prices fall, more people will be deterred from buying.
“Does a payment change of more than $1,000 per month on a $1 million mortgage or $500 per month on a $500,000 mortgage make people think about renting instead? The answer is yes. This is especially true when mortgage rates are rising faster than house prices are falling,” Silverberg said.
Rising rates won’t just encourage people on lower incomes to consider renting. A few weeks ago, PIMCO executive and bond expert Mark Kiesel said he might be considering selling his house to rent out. He previously sold his house at the top of the US housing bubble and bought at the bottom, almost perfectly timing the trade based largely on the bond market. While in the United States, similar monetary and valuation conditions exist in both regions.
Certainly, American real estate is not at the extreme in Canada.