Up to 80% of variable-rate borrowers have hit their trigger rate: National Bank

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Nearly 8 in 10 fixed-payment variable-rate borrowers have hit their trigger rate, according to data from National Bank of Canada.

The finding was released in a report last week written by National Bank Financial economists Stefane Marion and Daren King. They estimated that between 73% and 80% of variable-rate mortgage holders with fixed payments have hit their trigger rate, depending on when the mortgage was originated between 2020 and 2022.

The trigger rate is the point where the borrower’s monthly payment is no longer covering rising interest costs, and generally results in the borrower needing to increase their payment.

Cumulative share of variable-rate fixed-payment mortgages
hitting trigger rate by year of origination or renewal

Last week’s 25-basis-point rate hike by the Bank of Canada “will not go unnoticed by the 30% of Canadian mortgage holders who have variable-rate mortgages,” the economists wrote.

“For variable-rate mortgages taken out before 2020, the proportion [that have hit their trigger rate] will be 63%, compared to only 25% three months ago,” they added. “This is what we meant when we said recently that the negative impact of marginal rate increases is not linear at this stage of the economic cycle.”

Mortgage arrears unchanged at 0.15% in November

Mortgage arrears crept up slightly in November, according to data from the Canadian Bankers Association. But the change wasn’t enough to impact the overall arrears rate, which remained at 0.15%.

That’s just off the all-time low of 0.14% reached between June and September, but still well below the highs seen during the pandemic, when the arrears rate reached a peak of 0.27% in June 2020.

In total, there were 7,426 mortgages that were behind payments by 90 days or more out of a total pool of over 5.1 million.

However, delinquencies is considered a backward-looking indicator, which tells us more about what was happening a year ago than it does today, notes Ben Rabidoux of Edge Realty Analytics.

That’s because when a borrower loses their job, they typically have savings that can get them by for six months to a year, or get a mortgage refinance. On top of that, mortgages aren’t considered delinquent until they are at least 90 days overdue.

“What’s a much better indicator is looking at things like credit card delinquencies, [which is] definitely ticking up,” he said on a recent call for clients. “So, you can kind of roll forward six months and this is going to be the trend in mortgage delinquencies. They will be kicking up, but not back to pre-COVID levels.”

U.S. Fed hikes rates 25 bps

Following in the footsteps of the Bank of Canada’s rate hike last week, the U.S. Federal Reserve yesterday raised its key lending rate by 25 basis points.

That brings the fed funds target to a range of 4.50% to 4.75%.

In its policy statement, the Fed noted that “inflation has eased somewhat but remains elevated” and that “ongoing” rate increases will be appropriate.

The statement “continues to make clear that the Fed isn’t done yet, and December’s dot plot showed the vast majority of FOMC participants (17 of 19) thought fed funds would have to rise above 5% this year,” noted Josh Nye of RBC Economics.

“But at a slower 25-bps pace, that would mean the Fed continuing to hike through early May, an unlikely prospect if the economic outlook softens further and inflation continues to moderate as we expect,” he added.

GDP data shows weakness in residential construction

Canada’s economy eked out 0.1% growth month-over-month in November, with early estimates for December suggesting a flat reading.

The November data showed particular weakness in residential building construction, which was down 1.8%, marking its seventh decline in eight months and the largest drop since May 2022.

“All types of residential activity fell in November, with new construction of single detached homes and home alterations and improvement leading the contraction,” Statistics Canada noted.

“Interest rate hikes by the Bank of Canada over the course of 2022 continued to have an effect on activity at offices of real estate agents and brokers, residential building construction and legal services which have been trending downward since the spring.”

TD Economics’ James Orlando said the report isn’t likely to cause the Bank of Canada to have second thoughts over its signalling that it will now pause its rate hikes.

“The economy hasn’t yet absorbed the impact of past rate hikes,” he wrote. “Though we are seeing the beginning of this, there is more to come, with GDP and employment growth set to stall in the coming months. Even though today’s growth numbers are holding up well, the BoC can feel comfortable keeping its policy on cruise control a little while longer.”           

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