Increasing Stress levels due to increasing rates
We are all aware of this year’s 2018 changes which include rate increases. Therefore, all financial institutions have increased their rates. We have seen an increase go up by 20 basis points (BPS) on fixed terms.
All financial institutions have raised their posted 5-year fixed rate by 15 BPS to 5.14%. These increases are to boost Bank of Canada’s qualifying rate. In one week alone we have seen an increase from 4.99%-5.14%. We have not seen a posted rate over 5.00% such as now since the past 4 years.
The Bank of Canada’s qualifying rate is crucial because of it is used for mortgage testing, making it more difficult for borrowers to qualify. Using 5.14% as the qualifying rate, this would cut borrowers buying power by about 1.4%. For example, for a household making $70,000.00 a year, this would mean a $4000-$5000 smaller mortgage approval. In actual fact, it could be more as each borrower is different due to what they are eligible for. This would include: contract, rate, equity and insurance.
The last time a mortgage borrower had to qualify with such a high rate was in 2008, at which; time stress testing was not even introduced.
Can we expect more rate hikes ? Yes !
The Bank of Canada is said to expect even a further increase to its overnight target rate by about 0.25% even after its quarter point hike back in July and September.
Based on the economic environment, the increase of these rates are a done deal and people have to be prepared for this to stay.
The President and chief of Bank of Canada is concerned about the amount of debt households will incur and the impact it will take due to these rates rising. Not to mention, the way the housing market will decrease immensely due to the new B-20 changes for 2018.
Bank of Canada wrote, “The challenge for us will be to weigh the risks against incoming data that we expect to support a case for higher interest rates throughout 2018”. Outlining an expected 75 BPS to be tighter through the year.
To finalize at the moment, we are sitting at a rate of 3.20%, so an increase of 25 BPS would have an impact on some variable rate mortgage holders as they would see their payments increase including those with lines of credit. However, for variable rate holders although there wouldn’t be an increase in payments, what they will see is a portion of the interest payments increase while the principal portion declines.
For further clarification on all mortgage changes for 2018 and increasing rates, reach out to one of our talented Noble Mortgage agents today.