OTTAWA: Canadian consumers are feeling little pain from four rate hikes by the Bank of Canada, despite all warnings to the contrary, with most escaping higher monthly mortgage costs, others priced out of home buying altogether, and many enjoying income gains.
Data released on Friday showed retail sales rose 2.0 percent in May and are on track to expand at an annualized pace of about 4 percent in the second quarter, defying predictions that rising interest rates would douse the long consumer boom.
While official interest rates have risen 1 percentage point in a year, analysts said the structure of Canada’s mortgage market means few borrowers have felt the rate hikes, and those priced out of the market are now spending their money elsewhere.
“Somewhere between 10 percent and 12 percent of mortgage holders are actually in a product that is going to be affected by a rate increase,” said Paul Taylor, President and Chief Executive at Mortgage Professionals Canada.
More than 7 in 10 mortgages have a fixed interest rate, Taylor said, while the others are split between adjustable and variable rate mortgages. While adjustable rate mortgages see higher monthly costs when rates rise, variable rate mortgages typically come with fixed monthly payments.
That means borrowers simply pay more interest and less principal when rates rise, and the length of their mortgage term is bumped out by a few months, said Rob McLister, founder of mortgage rate comparison website RateSpy.com.
“So their monthly cash flow stays the same,” McLister said, noting that Canada’s big banks, which hold about half of Canadian mortgages, typically offer fixed-payment variable mortgages.