We are heading into the most challenging period to own a home since the interest rate surge of the e

Topping today’s fiction bestseller list is a story of how rising interest rates are no big deal for homeowners.

The plot goes like this: As much as rates rise from current levels, they’ll still be close to what many people paid if they bought homes or renewed mortgages before the pandemic. In any case, these homeowners have passed a stress test that probes their ability to afford higher interest rates than at the time of purchase. There’s no suspense if rates rise because lenders have already ensured they have enough income. Otherwise, they didn’t get a mortgage.

Unfortunately, there are some holes in this plot. The real story is that we could be headed into the most challenging time to have a mortgage since the interest rate surge of the 1980s.

In a report to be issued Thursday, CIBC Economics offers some context on rate hikes. Variable-rate mortgage payments don’t generally change as rates rise – instead, the amount of payments directed toward principal as opposed to interest falls. With fixed rate mortgages, only about 20 per cent renew in any one year. Over all, about $350-billion in mortgages will be affected by changing rates in 2022.

The report says people who renew mortgages between 2022 through 2024 have a kind of “immunity” that comes from the fact that the mortgage rates they got a few years ago are above current levels. The increase in rates to come may leave those renewing with mortgages that are only a little more expensive than they now pay.

“But without a booster (lower rates in 2025/2026), that immunity will fade for borrowers that entered into mortgages during the pandemic,” CIBC deputy chief economist Benjamin Tal writes. “And given that in the past two years mortgage originations rose by more than 60 per cent relative to their pre-crisis level, that might be a significant shock.”

Homeowners today actually face three waves of adversity, rates being just one of them.

The first wave is the change in spending patterns caused by the gradual return to normal lives and normal spending as we work through the pandemic. People who bought homes in the past 18 months will have to relearn how to factor vacations, entertainment and socializing into their household budgets.

Read the full article HERE

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