Despite a challenging economic landscape characterized by high interest rates and continued inflationary pressures, Canada’s covered bonds have demonstrated robustness that bucks the current trend. In a recent report, Fitch, the renowned credit ratings agency, maintained Canada’s AA+ Long-Term Foreign Currency Issuer Default Rating (IDR), lending a reassuring outlook amidst rising mortgage rates.

These persistently high ratings were achieved in spite of a tumultuous 2022, marked by falling home prices, significant inflation, and increased interest rates. Key to this resilience is the structure of the B-20 guidelines governing the loans that form the covered bond pool of assets. A crucial component of these regulations is the mortgage stress test, which mandates that potential homebuyers qualify for an interest rate two percentage points higher than their contractual rate.

But while this resilience bodes well for the market at large, increasing fixed mortgage rates are stirring concerns for a variety of homebuyers. Let’s delve into what these developments could mean for new or first-time home buyers, families looking to upsize, and retirees or seniors considering downsizing.

First-time Home Buyers

New entrants into the housing market could feel the pinch of rising fixed mortgage rates, as lenders continue to adjust their rates in line with the surging Government of Canada bond yields. Increases in the rates for 1- and 2-year terms to up to 6.25% and 6.40% respectively have been observed, pushing the financial boundaries for first-time buyers.

Any potential buyers should remain vigilant, considering both their current financial state and potential future rate hikes. On the positive side, first-time buyers could benefit from the stability of bond ratings, indicating a certain degree of resilience in the housing market.

Upsizing Families

For families looking to upsize, higher interest rates may mean larger mortgage payments. While families might have more financial flexibility than first-time buyers, an additional rate hike could strain their budget.

Consequently, families considering upsizing might need to reassess their plans and perhaps delay their move until the market stabilizes. On the flip side, falling house prices might present an opportunity for those with secure financial footing to upgrade their living situation at a potentially lower cost.

Retirees and Seniors

Rising mortgage rates might have a different impact on retirees or seniors, particularly those looking to downsize. If they have an existing mortgage, they could face higher payments with adjustable rates.

Now, those who own their homes outright may find this an advantageous time to sell, particularly in areas where demand remains high despite the falling home prices. They may then opt to rent or move to areas with lower housing costs, effectively capitalizing on the current market conditions.

Given the economic landscape, the Bank of Canada’s recent increase of the overnight rate to 4.75% further compounds these concerns. With persistent high inflation, the bank’s decision puts additional pressure on mortgage borrowers. Current market forecasts suggest another quarter-point rate hike could be around the corner, meaning all categories of buyers need to factor these potential hikes into their planning.

These rising rates have been driven in part by hawkish comments from Federal Reserve Chair Jerome Powell, suggesting more policy tightening is on the horizon. Rate hikes by other global central banks have only amplified concerns about inflation and the economic impact of higher-than-expected policy rates.

The resilience of Canada’s covered bonds provides a silver lining to the rising mortgage rates. However, the implications vary greatly for different demographic groups. Whether you’re a first-time homebuyer, a family seeking to upsize, or retirees looking to downsize, it’s critical to stay informed about the latest market trends. Consider seeking professional financial advice to make decisions that align with your financial goals and the current market landscape.

While the situation might seem daunting, let’s put the pieces together and look at the big picture. Despite the falling home prices, the overall economic health of Canada remains positive. This is good news for all segments of buyers, as it reflects a sturdy financial environment that can absorb shocks and rebound from downturns.