Where do mortgage rates go from here?

They can’t go lower, can they? And what if mortgage rates start to climb? Could that be the last straw for the housing market?

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It’s tough to make a pan-Canadian call on where real estate will land in 2013. The Prairie provinces seemed posed to avoid the downturn, but sales are starting to fall in many markets with a price dip happening already or predicted to be on the horizon.

All this is happening with five-year fixed closed mortgage rates below 3%, even at some of the big banks. The 10-year mortgage, still not popular with Canadians, is down to 3.64%.

It’s not a stretch to think the rate on both of those terms will climb two percentage points. And what of the prime lending rate? It’s still 3% but tied to the Bank of Canada, which has been threatening to raise rates for months.

Rates could also go lower but one problem might be an antagonistic finance minister in Jim Flaherty who keeps warning the banks not to get into a so-called “mortgage war” by lowering rates.

This month Manulife Bank buckled under pressure from the Department of Finance and raised its 2.89% five-year fixed rate closed mortgage back up to 3.09% because of government concern.

“We think rates have to get to more normal levels,” said Craig Wright, chief economist with the Royal Bank of Canada, which said in a February report that one of the reasons home ownership has remained affordable is those low rates.

The bank’s affordability index shows the proportion of pre-tax household income required to service the cost of a mortgage, property taxes and utilities. On a two-storey home, it reached 47.8% in the fourth quarter of last year, but that was down 0.3 percentage points from a quarter earlier.

Mr. Wright said as rates have dropped, consumers have been moving into five-year mortgages at a faster pace and that will likely continue if the fear is they are going to rise. That’s a generally positive development because it means only a portion of five-year mortgages come due every year, so any interest rate shock is slowly worked into the market.

The real battle remains for first-time buyers. They already face tougher rules on eligibility for mortgages. They can only amortize over 25 years if they have mortgage default insurance, something required with less than a 20% downpayment.

Garry Marr | 13/03/25

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