7 Rate Hikes by Year End? Borrowers Beware

If the Bank of Canada decides to be more aggressive to tame inflation, seven rate hikes by year end are possible.

Equifax reports fewer new mortgages in Q4 2021 or before the initial rate hike by the Bank of Canada (BoC) early this month. However, the agency also reveals the continuing increase in consumer debt. With inflation and home prices rising at a rapid pace, the central bank might take a more aggressive step in April 2022.

The financial markets are pricing an equivalent of three 25-basis-point increases through the Fed’s meeting in June 2022. A total of at least seven hikes by year-end looms as well. But for CIBC, BoC should hold off a double-dose increase next month. The bank’s fixed-income team recommends a 50-basis-point increase mid-year.  

Ian Pollick, CIBC managing director and head of Fixed Income, Currency & Commodity Strategy, said it wouldn’t be ideal for the central bank to raise rates by a full half-percent at the April meeting. He cited some clogs in the financial system that needs to be cleared.

Caution, careful

Image source: Getty Images

Impact on mortgage borrowers

Prospective homebuyers should evaluate their options carefully in wake of the rate-hike cycle. Loans, credit lines, and mortgages become more expensive with significant increases in borrowing costs. If home prices remain high, down payments will likewise be high.

Mackenzie Investments forecast mortgage rates (variable and fixed) to top 3% at the end of 2022. The impact on Canadian homeowners is higher debt-servicing costs, which could rise to unprecedented levels. Moreover, higher rates will drain liquidity from homeowners with outstanding or existing mortgages.

On the investment front, Canada’s primary stock market is up 3.56% year to date on the strength of the energy (+37%) and materials (+19.21%) sectors. However, if you’re looking for income streams and capital growth, Toronto-Dominion Bank (TSX: TD)(NYSE: TD) and Mogo (TSX:MOGO)(NASDAQ:MOGO) are an ideal combo.

Recurring income stream

Canada’s second-largest bank will soon have access to one of the fastest-growing regions in the United States. After Q2 2021, TD already announced the desire to use its excess common equity tier one (CET1) capital for M&A, particularly across the border.

On February 28, 2022, TD announced the planned purchase of First Horizon Corp for US$13.4 billion. The premier regional bank should accelerate TD’s long-term growth strategy in America. But with or without the acquisition, the big bank stock is a reliable recurring income source owing to its 165-year dividend track record. At $101.97 per share, the dividend yield is 3.49%.

Capital growth

Mogo is cheap with high-growth potential in 2022. The $283 million financial technology company provides simple digital solutions to help Canadians improve and better manage their financial health. Market analysts recommend a buy rating and forecast the current share price of $3.66 to climb 105% to $7.50 in 12 months.

The net loss in Q4 2021 widened to $29.6 million from $13.4 million in 2020 due a $22.0 million non-cash loss on the revaluation of Mogo’s derivative purchase warrants in Coinsquare. However, the $70 million revenue for the quarter was a record. Also, subscription and services revenue increased 135% versus the same quarter in 2020.

Borrowers beware

Multiple rate hikes are coming until 2023. Canadians intending to borrow should beware. Bill Schwartz, Wealthspire Advisors’ managing director, said, “All of those things you borrow money to buy will cost more.”    

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Bank Stocks

a person searches for information on the internet
Bank Stocks

Still Not Collecting Dividends? Here’s 1 Stock to Start With

This Canadian bank’s growing dividends, strong stock performance, and improving earnings could give new income investors an appealing place to…

Read more »

Group of people network together with connected devices
Bank Stocks

Everyone’s Snapping Up These Stocks: Should You?

These two popular Canadian financial stocks have already delivered strong gains, but their strong fundamentals suggest there is still plenty…

Read more »

coins jump into piggy bank
Bank Stocks

Thinking About Bank Stocks? Here’s What to Know in September

After a strong run so far this year, here’s what Canadian investors should know about the big bank stocks in…

Read more »

Fed Chairman Jerome Powell speaks with U.S. president Donald Trump
Stocks for Beginners

Bank Stocks Wilted After the Fed Raised Interest Rates: Is Now the Time to Buy the Big Six?

Why waiting before buying the Big Six may be a prudent move for Canadian investors.

Read more »

shopper carries paper bags with purchases
Stocks for Beginners

Are You Spending More Just to Use Your Credit Card Perks?

Credit-card rewards lose their appeal quickly when earning them pushes you to spend money you never planned to spend.

Read more »

young adult uses credit card to shop online
Stocks for Beginners

Credit-Card Rewards Keep Changing: What Does That Mean for Bank Stocks?

Changing credit card rewards show how hard Canadian banks are competing to attract spending and deepen customer relationships.

Read more »

dividend stocks bring in passive income so investors can sit back and relax
Bank Stocks

Is Your Premium Credit Card Still Worth the Annual Fee?

Scotiabank's premium-card offering currently charges $150 annually, includes six lounge visits, and waives the typical 2.5% foreign-exchange markup.

Read more »

Bank Stocks

The TSX Dividend Stock Built for People Who Want One Less Thing to Worry About

This established TSX dividend stock remains an income pillar for risk averse long-term investors.

Read more »