Canada's Mortgage Market Vulnerable to Rate Hikes, Experts Warn

Canada's mortgage market, dominated by short-term contracts, leaves households vulnerable to interest rate increases. Experts recommend 10-year fixed-rate mortgages to mitigate payment shock and suggest strategies to secure competitive rates.

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Aqsa Younas Rana
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Canada's Mortgage Market Vulnerable to Rate Hikes, Experts Warn

Canada's Mortgage Market Vulnerable to Rate Hikes, Experts Warn

Canada's mortgage market, dominated by short-term contracts, leaves households vulnerable to interest rate increases, according to experts. They suggest that 10-year fixed-rate mortgages could help mitigate payment shock for borrowers.

Why this matters: The vulnerability of Canada's mortgage market to interest rate hikes has significant implications for household finances and the overall economy. If left unaddressed, it could lead to increased debt burdens, reduced consumer spending, and a potential slowdown in economic growth.

Currently, the average interest rate on a 30-year fixed mortgage stands at 7.49%, slightly lower than the 7.52% seen a week ago. For a 15-year fixed mortgage, the average rate is 6.79%, an increase of 0.08 percentage points from the previous week.

To put these rates into perspective, a 30-year fixed mortgage at today's interest rate of 7.49% will cost $699 per month in principal and interest for every $100,000 borrowed. Over the life of the loan, the total interest payment would amount to $151,545. Similarly, a 15-year fixed mortgage at the current rate of 6.79% will cost $887 per month in principal and interest for a $100,000 loan, with a total interest payment of $59,693.

Experts point out that multiple factors influence mortgage interest rates, including the overall health of the economy, benchmark interest rates, and borrower-specific factors. "The Federal Reserve's rate decisions and inflation can influence rates to move higher or lower," the article notes.

To mitigate the impact of payment shock caused by interest rate hikes, experts recommend considering 10-year fixed-rate mortgages. Borrowers can also improve their chances of securing competitive rates by maintaining a good or excellent credit score, keeping their debt-to-income ratio below 43%, and making a down payment of at least 20%.

Additional strategies for securing favorable mortgage rates include comparing lenders and loan programs, buying discount points or lender credits, and taking advantage of rate locks. Rate locks typically last 30 to 60 days but can be extended up to 90 or 120 days, depending on the lender, though additional costs may apply.

As interest rates continue to fluctuate, Canada's mortgage market remains vulnerable to the impact of rate hikes on household finances. By considering longer-term fixed-rate mortgages and implementing strategies to secure competitive rates, borrowers can better protect themselves against potential payment shock in the future.

Key Takeaways

  • Canada's mortgage market is vulnerable to interest rate hikes, threatening household finances.
  • 10-year fixed-rate mortgages can help mitigate payment shock from rate increases.
  • Average 30-year fixed mortgage rate is 7.49%, and 15-year fixed rate is 6.79%.
  • Borrowers can secure competitive rates with good credit, low debt-to-income ratio, and 20% down payment.
  • Rate locks, discount points, and lender credits can also help borrowers get better mortgage rates.