How The New Interest Rates Could Actually Help You

Woman lays with dog on bed while working on her laptop.Much to the dismay of pretty much everyone, on July 13 the Bank of Canada announced another interest rate hike of 100 basis points to 2.5%.

This is the largest single rate hike since 1998 and more are on the way with the next slated to take place September 7. Sounds scary, we know. But bear with us because it’s not all doom and gloom, we promise.

Before we get into the nitty gritty of what this means for those in or looking to get into the real estate game, let’s break down the what and why of this whole inflation vs. interest rate business.

Why does the BoC keep hiking rates? 
The general aim of the Bank of Canada is to keep inflation between 1-3%, ideally at 2%. This number is based on the year-over-year increase in the consumer price index (CPI), which is made up of goods and services like food, housing, transportation, clothing, etc. You know, just the regular old survival essentials.

Currently, inflation is sitting at nearly 8%; the highest in 40 years. This rate isn’t expected to come down any time soon and the bank doesn’t anticipate inflation as a whole to come down to 3% - the high end of their target - until at least 2023
In other words, keep cutting out those grocery coupons for the foreseeable future. 

What is causing such high inflation?
In this case, it’s a combination of issues including ongoing supply disruptions, the war in Ukraine, and excess demand (meaning the demand for goods like housing, oil, lumber, etc. is far greater than the available supply.)

How does this impact prospective home buyers?
Those not yet in the market must now pass a higher stress test. It is currently sitting around 7% for a fixed rate mortgage and around 6% for a variable rate. So yes, you can qualify for a bit more with a variable rate but it comes with the risk of much higher payments in the not so distant future (as in, September 7).

The good news for this group? Most economists are predicting a 10-15% decrease in home prices by the end of 2022 and a buyer’s market in the majority of regions. So you may not be able to borrow as much but you will have lower prices and some potentially significant negotiating power. 

How does this impact current home owners?
If you’re up for renewal on your mortgage but staying with the same lender, you will not have to pass the new stress test. However, you are likely going to be faced with a new, much higher rate. If you’re renewing with a different lender, you’ll also need to pass the new stress test.

So what can I afford?
Let’s assume you’re looking to buy a home for $650,000 with 10% down ($65,000). You would then need mortgage insurance, which is required for down payments less than 20%. In this case, that would equal $18,135. With a 25 year amortization, that means you’ll require a total mortgage of $603,135.

Currently, 5-year fixed rates are sitting between 4.34 - 4.99% so let’s say we have a rate of 4.59%. (Note: If you’re in the banks good books as a borrower, you may qualify for prime - 1, which means the rate would be 3.34-3.99% but let’s be conservative here and assume you’re not).This would mean you would have monthly payments of $3,368 per month.

If you got a variable rate mortgage, it would be slightly lower as they are sitting between 3.5-3.8%. So let’s go higher end and say you got a variable rate mortgage at 3.8%. That would mean your payments would be $3,108 per month.

If the BoC raises rates by another 100 bps on September 7 as predicted, the fixed rate mortgage above would now be $3,713 per month while the variable rate would be $3,440.

The gist
So let’s be honest and admit there’s no question the news and the numbers aren’t exactly great. And things seem particularly steep right now because the price of well, everything has skyrocketed. But the hope is that as rates continue to rise, the cost of living will move in the opposite direction, leaving at least a few extra dollars in your pocket once again. 

In the meantime, our best advice is to plan accordingly with a financial advisor, talk to a trusted mortgage specialist and secure a rate now if you’re serious about buying. Rates can typically be held for 90-120 days.

And don’t forget, while there is less “free money” available right now, there’s also a lot less competition and there will soon be lower prices and far more negotiating power for buyers. 

If you’d like to chat further, we are always here to help. Reach out any time to book a consultation or head here to use our handy mortgage calculator!