Alert: Mortgage Rates Could Go Higher in 2021

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

| More on:

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

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »