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Sat, 24 Aug 2013 13:45:00 GMT | By Deirdre McMurdy, MSN Money

Why mortgage rates are going up

Higher mortgage rates are symptomatic of bigger economic issues for Canada.

Deirdre McMurdy

The last few weeks of August are always a time of reckoning.

The signs that another summer is winding down are everywhere. Even those who aren’t part of the annual back-to-school ritual can’t escape its powerful vibe. And all the decisions and issues we’ve managed to avoid — or at least delay — over the course of July and August, must now be confronted.

With all this seasonal poignancy floating in the air, it’s a perfect time for banks to raise mortgage rates once again, unleashing anxieties that are likely to frame the economic agenda through the fall.

If you think that issues like the proposed expansion of oil pipelines into the U.S. or household debt levels don’t affect you directly, you’re dead wrong.

A sharp drop in demand for Canadian government bonds — largely rooted in tepid economic growth and an even more tepid outlook — is making your mortgage more expensive.

All the banks have bumped up the cost of home loans over the past few days.

The general rule is that a one per cent increase in mortgage rates equals a 10 per cent reduction in the affordability of homes. A rise of 20 basis points — which several banks introduced this past week alone – means payments on a variable rate mortgage of $500,000 are as much as $100 per month more.

That’s money that consumers, already jittery about volatile employment numbers and a weak economy, won’t have in their pockets any more.

In the past five months, the cost of a mortgage has increased by one-third. Not altogether surprisingly, the latest retail data shows that spending was down 0.6 per cent in June from just a month earlier.

That’s quite a bit more than was expected and — special situations like the Alberta flood and Quebec construction strike aside — the poorest performance was in Ontario. Toronto, the country’s largest city, also happens to be one of the perennially hottest housing markets.

There’s also a psychological shift that sets in as mortgage rates climb. And it’s a shift that seems to be reflected in those retail figures: when mortgage rates are low, people focus on rewards over risks. Eyes firmly trained on the prize — and neighbourhood comparables — they convince themselves that a dramatic long-term return is inevitable.

Higher financing costs, however, tend to result in a dramatic recalibration of the risk/reward calculation. And that fear factor makes the return to “normal” monetary policy even trickier.

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