By now you have probably heard about the prime mortgage interest rate changes triggered by the Bank of Canada’s (BoC) interest rate hikes. These rate hikes have caused a dramatic shift in the real estate market and there will be a number of consequences in the coming months.
If you’re wondering what changed and how this might affect you, then this post is for you.
Over the past year, the Bank of Canada has increased interest rates steadily. These interest rate hikes amount to a combined 2.25% increase. The BoC is looking to cool runaway inflation by applying pressure to our cost of borrowing and consequently reduce consumer spending. This has a direct impact on the real estate market.
The recent changes are reflected in the rate that Canadians can get from lenders. Banks raise their prime rate according to the changes made by the BoC. For example, last summer the lender’s prime rate was sitting at 2.45% and borrowers could get a variable/adjustable rate mortgage at Prime minus 1% or a net rate of 1.45%. Today that same borrower would be paying a net rate of 3.7% based on today’s prime rate of 4.7%. This prime rate is expected to climb further next month to 5.7%, further impacting borrowers’ disposable income as these higher rates will be reflected in loans on things like variable and adjustable rate mortgages and lines of credit.
Homeowners with a variable mortgage interest rate are feeling the weight of the BoC changes the most. Each announcement of a raised interest rate pushes Canadian lenders to increase the rates for their loans. Homeowners with a variable mortgage have been watching their budgets tighten over the past few months.
In many cases, homeowners consider locking into a fixed-rate mortgage as variable rates are expected to continue to rise. If this is you, it is imperative to speak with a licensed broker before taking such action. There are several factors to consider before converting to a fixed rate mortgage such as your lender, remaining term, outstanding balance and household budget. If you convert today you immediately lock into a fixed rate that is roughly 1% higher than your current variable rate. You are also sacrificing your existing 3-month interest penalty (if you were to break your mortgage term) and locking into a potentially very costly IRD penalty. The last thing I would want for my clients is to have them convert to a fixed rate today at 4.7% and be stuck in that fixed rate if/when rates come back down.
Homeowners with a fixed mortgage interest rate will not be impacted by recent changes compared to those with a variable rate. Over time, fixed-rate mortgages tend to cost homeowners more money. When rates are in high fluctuations, however, fixed rates maintain a secure and consistent monthly cost. This can protect homeowners from dramatic changes and can make budgeting easier since there is more consistency.
However, if your mortgage term is coming up for renewal in the next 12 – 24 months then it is highly recommended that you schedule a call with me to discuss future mortgage budgeting as you could be facing a significant increase in your monthly payment at renewal.
For homebuyers, the BoC rate hikes can greatly influence what is affordable. This is especially true for first-time homebuyers. When the interest rates are high, the carrying costs also increase. With higher carrying costs, smaller loan amounts may only be available.
For example, a $500,000 mortgage amortized over 25 years at a 3% interest rate will result in a $2,366 monthly payment. If the rate is raised to 4%, the monthly payment will go up to $2,630. This amounts to an extra $264 pulled from the budget each month.
Today homebuyers are required to qualify at their contract rate plus 2%. If your mortgage offer is for 4%, you are required to qualify as though you are paying 6% interest. In the example above, that means qualifying as though your monthly payment is $3,200. This is called the “stress test”. If prospective home buyers don’t pass the financial stress test, then lenders are obligated to decrease the loan amount until the buyers meet the stress test. This has made the home buying more challenging for many people across the country.
During turbulent times, homeowners and buyers are feeling the stressful effects and economic tolls caused by the BoC interest rate hikes. Perhaps now more than ever, it is important to partner with professionals who can help you safely navigate through difficult times.
If you need help with your mortgage, whether you’re a homeowner or a potential buyer, working with an established broker can help you make the right decisions about your home financing. Contact me to schedule a phone or zoom call to talk about your potential mortgage options.