The bank of Canada increased the overnight lending rate by 1% today. It is expected that banks, credit unions and monoline lenders will increase their prime rate over the following weeks. This will increase will impact your borrowing power as well as the cost of variable rate mortgages (VRM), adjustable rate mortgages (VRM) and home equity line of credits HELOC).
The Cost of Rising Rates
This increase in interest rates will drive the cost of floating rate mortgages and lines of credits up by $80 per month. Homeowners with adjustable rate mortgages will see their monthly payments increase by roughly $52.
With nearly 25% of home buyers borrowing over $600,000 to buy a home in the last quarter of 2021 these increases represent a significant increase in the monthly cost of the average mortgage in Canada.
Borrowers who have variable rate mortgages will not see their payments increase but will have the debt they pay down with each mortgage payment reduced.
Those who took variable rate mortgages when the prime rate was 2.7% need to be vigilant as trigger points in their mortgages loom closer. If you have any questions about trigger points or need any advice let us know.
What does this mean for your qualifying power?
These changes do not have a direct impact on fixed rates but bond yields (the primary driver of fixed mortgages) have been falling since they spiked mid June.
Anyone seeking a five year fixed rate mortgage with any federally regulated lender (monolines and banks) has lost nearly 20% of their borrowing power due to the stress test since February 2022.
Due to the Bank of Canada increase today borrowers will lose nearly 8% of their borrowing power on floating rate mortgages (ARM and VRM) as well as HELOC’s.
What should you do?
We suggest that borrowers take a few steps to assess their next moves.
- Complete a personal budget to determine the total cost of housing you can afford (let us know if you need a tool for this)
- Work out at what interest rate you reach your maximum housing budget (we can help with this)
- Use this maximize allowable rate to determine if a fixed or floating rate option is best for you
If you need any help with this send your questions to Keaton@KBMortgages.ca or setup a call here – https://calendly.com/kbmortgages/help-kbmortgages-
What today’s rate increase means for the market?
At this point there is no questioning the fact that rising interest rates have begun to impact the borrowing power of home buyers. The “stress test” is beginning to force borrowers to consider between qualifying for larger mortgages with the uncertainty of variable rates or qualifying for less with the predictability of fixed rate mortgages.
If rates continue to rise and mortgage applicants continually qualify for less it seems logical that the housing market could fall in sync.
It will be interesting to see if policymakers begin to consider increasing maximum amortizations beyond 25/30 years to alleviate the rising cost of mortgages and offset the decline in borrowing power.
Let us know what you think. What will these changes mean for the Canadian housing market? Are they overdue and necessary or will they simply weaken the housing market?
While many debate the future of the housing market I imagine a select few will be finding exception opportunities during this slower market period.
