Today the bank of Canada announced that they are increasing the overnight lending rate by 0.5%. Canada’s banks are expected to increase their prime rates in the coming weeks. This will impact Canadian home owners with home equity lines of credit, adjust rate and variable rate mortgages.
It is important to note that these changes impact variable and adjustable rate mortgages directly. These increases DO NOT impact fixed rate mortgage directly. Do not let anyone pressure you into a decision based on these rate changes.
What does todays interest rate increase cost you per month?
This rise in rates will increase interest costs by $27.45 monthly for every $100,000 owed on variable and adjustable-rate mortgages. Borrowers with adjustable-rate mortgages will see their payments increase whereas those with variable-rate mortgages will not see an increase in payments. Learn more about the benefits and disadvantages of adjustable and variable-rate mortgages here.
This increase will impact some Canadian’s ability to buy or refinance.
This increase will not affect qualifying for a fixed-rate mortgage at most lenders but will impact qualifying for home equity lines of credit and some variable-rate mortgages. A borrower can expect to lose just over 8% of their borrowing power on a HELOC compared to the beginning of 2022. Most borrowers choosing a variable rate mortgages today will not be impacted but future increases to the prime rate will begin decreasing total qualifying power.
What is going on with fixed rates currently?
Bond yields give us the best insight into the behavior of five year fixed rates. Over the last 90 days bond yields have risen from around 1.5% to 2.7%. This has resulted in a significant increase to the average five year fixed rate.
Should you choose a fixed or variable mortgage?
After factoring in todays increase a borrower who chooses a variable rate mortgage would need to see between seven and ten 0.25% increases over the next two to five years to break even with current fixed rate mortgages. If you are debating fixed vs variable check out our analysis tool here.
For a comprehensive break down of the fixed vs variable debate you need to read this.
It is our opinion that variable rate is still the more flexible option for borrowers and likely the better choice.
Will this rate increase impact the housing market?
It is my expectation that the bank of Canada will begin to slow its pace of increases while it waits to see the impact of rising rates on the market. Rate increases typically take 60-90 days to begin to price into the real estate market and we can expect to see the cumulative affect of rising rates over the coming months.
What should Real Estate Investors and Home Buyers be aware of?
Presales and commercial transactions are a growing concern on my end. For presales, we are beginning to see presale contracts with clauses that increased construction costs can be passed onto buyers.
On commercial properties we have concerns about the impact of rising rates at renewal time. If a commercial real estate building’s net operating income does not increase in equal proportion to rising rates we will likely see lenders refusing to renew or requiring owners to pay down significant amounts of debt prior to renewal.
If you have any questions let us know or book a call with Keaton here.