Today marks the fourth interest rate increase from the Bank of Canada. The 100 basis-point increase is the highest yet this year and the largest rate increase since 1998. In its press release, the Bank of Canada stated “with the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today”. An interest rate increase was widely expected following the U.S. Federal Reserve’s 75-basis point hike in June, but many were not prepared for the 100-basis point hike. The Bank has also mentioned that Canadians can expect further increases. The next scheduled rate announcement is September 7, 2022.
Prospective Buyers, This May Impact Your Stress Test Outcome
Mortgage holders are following the interest rate announcements closely but are still waiting to learn when the Bank of Canada expects to end the continuous rate hikes. Home prices are trending downward in many markets, so although interest rates are rising, some buyers may be surprised by their expected monthly payments. “Following all-time highs in February, prices are stabilizing and the market is more balanced across the country. The rising interest rates shouldn’t deter prospective buyers from entering the market, but should encourage them to work with a real estate agent to learn which markets may have opportunities for them,” explained Lauren Haw, CEO of Zoocasa.
As the interest rates change, the stress test changes as well, often tightening the amount buyers are approved for. James Laird, Co-CEO of Ratehub.ca cautions that “a general rule to use is that someone qualifies for about 10 percent less mortgage for every one percent their stress test increases.” Buyers should work with their real estate agent and mortgage broker to calculate what mortgage they can expect to qualify for using different stress test scenarios. While the mortgage qualifying amounts may be decreasing, home prices across most parts of Canada have declined month-over-month in the past quarter. This may actually open up opportunities for buyers who were previously priced out of the market in early 2022.
The Impact on Variable Mortgage Rates
According to the Canadian Real Estate Association, the average home price in Canada in May 2022 was $711,316. Laird explained that a homeowner who put 10% down on a home purchased for $711,000 with a 5-year variable rate of 2.50%, amortized over 25 years has a monthly mortgage payment of $2,955. With the 100-basis point increase, the homeowner’s variable mortgage rate will increase to 3.5%, making their new monthly payments $3,294, an increase of 11.5%. The homeowner will now pay $339 more per month or $4,068 more per year.
If you have a variable rate mortgage, fixed payments can be a good option to help with budgeting in the case that interest rates rise more. With fixed payments, you will pay the same amount each month, but more of the payment will go towards the interest of your mortgage loan versus the principal.
Homeowners with a variable-rate mortgage can calculate what their new monthly payments will be using our mortgage calculator.
If you’re considering buying and/or selling this summer or fall, our qualified agents can help you navigate the changing market and interest rates. Download our free Buyer’s Guide and Seller’s Guide and contact us today!
