A strong and stable economy is always a good thing, but with stability comes something prospective homebuyers often fear the most–interest rate hikes.
The Bank of Canada recently announced that it would be hiking its policy rate to 1.75 per cent.
On Oct. 24, the BoC also announced that it increased its target for the overnight rate to 1 ¾ per cent.
While the modest hikes are signs of a stable economy, some real estate experts are cautioning residents to be aware of the impact they’ll have on homebuyers.
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“As the Bank of Canada has opted to hike its trend-setting interest rate in its seventh announcement of the year, it will once again become more expensive for borrowers to qualify for, and carry, a mortgage,” says Penelope Graham, Managing Editor, Zoocasa.
“The ripple effect of this and consequent rate hikes on housing affordability will be felt most strongly by first-time home buyers, particularly millennial buyers, most of whom have never experienced interest rates this high in their lifetimes.”
Zoocasa says the hike has implications for borrowers of all mortgages, as increasing Prime at the nation’s largest lenders will in turn influence the Bank of Canada’s benchmark rate, which is used to stress test both high- and low-ratio mortgage borrowers.
As a result, all new and renewing borrowers will qualify for smaller mortgage amounts based on this higher criteria.
Prospective homeowners have been dealing with a more challenging borrowing environment for some time. The implementation of the OSFI stress test already requires potential borrowers to qualify at higher rates than they’ll actually end up paying, effectively ensuring they’ll have some wiggle room with the mortgages they can take on.
While this is a protective benefit, it also ensures that some buyers will be unable to purchase most homes in Mississauga and the GTA, as it’s extremely rare to find any home–including a condo–for under $400,000.
The recent hike, combined with the stress test–could also make it more difficult for some current homeowners to renew their mortgages.
Zoocasa says current variable-rate borrowers will see their monthly payments rise based on how their lender prices in this recent hike, and applicants of new five-year variable mortgages priced at Prime could pay approximately an additional $65 – based on sample calculations using Canadian Real Estate Associations’ (CREA) average home price for September.
What’s the impact on monthly payments:
- For a 5-year variable rate at 3.70% (old prime), the monthly payment is $2,453
- For a 5-year variable rate at 3.95% (new prime), the payment would be $2,518
- That’s a difference of $65 per month, $780 per year, and $19,500 over 25 years, assuming no rate changes, etc.
- Please note: This sample calculation applies to a person getting a new mortgage only as mortgage renewal rates are dependent on a number of factors specific to the borrower
Zoocasa says calculations based on the following:
- Average home price: $487,000 (CREA, September 2018),
- 5% down payment,
- 25-year amortization
Calculation with household income to highlight affordability changes:
- A homeowner earning $100,000
- With a 30-year amortization and 20% down payment
- At today’s lowest contract 5-year rate of 3.33%, would be able to afford a $626,008 home.
- With the previous stress test, where they had to qualify at 5.34%, that qualified amount was chopped to a $523,772 home
- If the rate goes up to 5.54%, that gets cut further to $515,011 (-$8,761 toward the budget).
- If the rate rises to 6% by 2020, that gets cut further to $495,726 (-$50,000 less toward the budget).
So if you once qualified for a $626,008 home, you might only be able to afford a home that’s a little over $520,000. In Oakville, Burlington or Milton, that’s more of a challenge.
Does the rate hike make you nervous about purchasing a home in the region?