Alert: Mortgage Rates Could Go Higher in 2021

Mortgage rates could have an impact on Canadian Apartment Properties REIT (TSX:CAR.UN).

| More on:
edit Back view of hugging couple standing with real estate agent in front of house for sale

Image source: Getty Images

Mortgage rates across Canada are at an all-time low. You can currently lock in a five-year fixed rate for as low as 1.35%. That’s allowed more homebuyers to enter the market and push prices up. However, the rate could be poised to surge later this year, which could have far-reaching repercussions for the Canadian economy, stock market, and property prices. 

If you’re an investor or homeowner, here’s what you need to know. 

Mortgage rates

Mortgage rates are a pivotal metric for the Canadian economy. Somewhere around 10-12% of Canada’s Gross Domestic Product (GDP) is derived from financing, renting, selling, and constructing real estate. All these activities surge when mortgage rates are low, because buyers, investors, and developers can qualify for large loans. 

However, banks and lenders offer mortgages based on the Canadian government’s cost of borrowing. In other words, the bank can offer mortgage rates that are slightly higher than the Canadian government’s bond yields.

Canada’s five-year treasury bond yield dipped to 0.32% in March last year. Since then, the rate has more than doubled. Today, it crossed 0.86%. The highest level since the pandemic erupted. Some experts believe the rate could keep climbing higher. This could ultimately push mortgage rates up. 

Impact

Ron Butler of Butler Mortgage doesn’t expect an immediate impact from bond yields climbing. “Last time in 2018 we didn’t see any clear reduction of activity until five-year rates went over 3.00%,” he told me on Twitter today. Meanwhile, the Bank of Canada has assured Canadians that rates could stay lower for longer. 

However, if the bond yield continues to spike at this rate, the central bank may be compelled to push rates higher. Tighter mortgages expenses could make many rental units unviable and squeeze landlords. It could also cut access to the property market for a significant chunk of buyers. 

Meanwhile, properties across Vancouver and Toronto remain some of the most overvalued in the world. A drop in residential property prices could impact real estate investment trusts such as Canadian Apartment Properties REIT (TSX:CAR.UN). 

Canadian Apartments offers a 2.7% dividend yield at the moment. The stock price is up 21% since the crisis erupted in March last year. It’s now trading on par with book value per share. 

However, a drop in real estate prices could plunge book value lower. Meanwhile, a rise in mortgage rates could increase Canadian Apartment’s cost of debt. Combine that with high unemployment and low rental income, and you can see why 2021 could be an ugly year for this REIT. 

The impact of interest rates stretches beyond REITs. Growth and dividend stocks are currently trading at historically high valuations because interest rates are low. Put simply, investors don’t have anywhere else to place their cash and earn a decent return. As rates rise, some capital could shift from the stock market to treasuries and savings accounts. 

These risks should be on everyone’s radar.

Bottom line

Canadian bond yields are climbing, which could push mortgage rates higher. Keep an eye on this trend. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani owns shares of Twitter. Tom Gardner owns shares of Twitter. The Motley Fool owns shares of and recommends Twitter.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »