Experts and consumers alike have been split on what to expect leading up to today’s interest rate announcement from the Bank of Canada. With inflation still well above the Bank’s 2% goal, it announced an increase in the overnight lending rate, now reaching 5%.
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Rising Rates Cause Downward Pressure on Home Prices
As interest rates increase, the amount the average Canadian is approved to borrow for a mortgage tightens. This impacts home buyers and sellers alike. Now more than ever, it’s important for motivated sellers to be realistic about their listing price and remember to consider the new interest rate when reviewing comparable properties that have sold in their market in the past few months.
Prospective home buyers that have locked in a lower rate with a mortgage pre-approval may benefit from both a lower rate and the downward pressure rising rates put on home prices. James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender explains, “A hike will put downward pressure on home prices, which have rebounded since the beginning of the year, and cause transactions to slow over the summer.” However, with summer in full swing, this is the time of year when real estate interest begins to cool following the spring peak due to vacations and the busier time of year. This interest often rebounds leading into the fall months.
Variable Rate Mortgage Holders are Immediately Affected by the Rate Increase
Ratehub.ca notes that according to its mortgage payment calculator, a homeowner who bought a home at the May national average of $729,044 and put 10% down with a 5-year variable rate of 5.80% amortized over 25 years (total mortgage amount of $676,439) has a monthly mortgage payment of $4,248.
Following the 25-basis point rate increase, their variable mortgage rate will increase to 6.05% and their monthly payment will increase to $4,348. The homeowner will now pay $100 more per month or $1,200 per year on their mortgage payments.
Renewing Your Mortgage this Year? Read On
With more rate announcements scheduled this year, now is the time to hold a rate with a new lender. “If your mortgage is up for renewal within the next year, it’s a good idea to hold a rate with a new lender now. If rates jump up further in the future, it should make sense to break your existing mortgage and switch to that new lender before your rate hold expires to lock in the lower rate,” continues Laird.
Whether you end up renewing with your existing lender or moving to a new one, having another rate on hold gives you options at the time of renewal which may lead to monthly savings. Your existing lender may let you renew up to 150 days before maturity without penalties, so begin having conversations with your lender early. Read more tips to maximize affordability when renewing your mortgage here.
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