Photo: James Bombales

For months, industry watchers have wondered how higher interest rates could affect the Canadian housing market. Now, one economist is saying that homeowners should brace for a “sea change” when it comes to mortgage rates.

“For the first time in about 10 years, homeowners coming off five-year fixed-rate terms in Q1 [of 2018] were facing market rates a touch higher than those taken out at origination,” writes BMO senior economist Robert Kavcic, in a recent note.

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After years of historically low interest rates, the Bank of Canada has been steadily hiking the overnight rate since last spring. It currently sits at 1.25 per cent, and is widely expected to rise again before the end of the year. As banks raise mortgage rates in turn, homeowners could be in for a nasty surprise in the next year.

“After some reprieve through the rest of this year, this rate-reset amount is poised to rise more meaningfully by early 2019,” writes Kavcic.

He notes that rates were plunging in the wake of oil shock five years ago, which will make the current rising interest rate environment particularly jarring.

“If five-year fixed rates just hold steady at current levels (around 3.3 per cent), those with mortgages coming due in 2019-20 could be looking at a 50-basis-point increase,” he writes. “If rates gradually rise to 4 per cent, the reset impact will top one percentage point (ie north of $200/month if you took out a $500,00 mortgage in 2014.”

All this comes at a time when Canada’s hottest housing markets are historically unaffordable. According to a report released by the National Bank last week, both Toronto and Vancouver are unaffordable for many would-be buyers.

“First-time buyers can turn to condos, but even there the price of ownership is $500,000,” reads the report. “The monthly payment for a condo is now a record 41 per cent of median income, compared to an average 29 per cent since 2000.”

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