INTEREST RATE INCREASE: PUTTING IT IN PERSPECTIVE
Last week, the Bank of Canada (BOC) announced an interest rate increase of 0.5%, or half a point. Although that doesn’t sound like much, it actually represents the biggest one-time rate hike in 22 years. Historically, when rates have been adjusted, it’s usually been done in smaller increments of 0.25% at a time, so relatively speaking, this might sound quite substantial.
It’s no secret that we are experiencing inflation at unprecedented levels. Among the factors, the conflict in Russia and Ukraine is likely causing a ripple effect that is being felt around the world. It’s not just affecting fuel prices either, but supply chains across several industries, ranging from transport to manufacturing, to agriculture and food supply. You may have noticed this on your weekly grocery bill or when eating out at a restaurant.
How is all this going to impact our local real estate market?
We decided to reach out to one of our trusted mortgage specialists Martin Crete to help gain a better understanding of how this interest rate increase will impact the average home buyer, or the existing homeowner who may be renewing a mortgage.
He explained that in 2018, Canada implemented something called the “stress test” for all new borrowers in an effort to protect Canadian homeowners by ensuring they spend within their means. The stress test requires homebuyers to prove that they can afford a mortgage at a “qualifying” rate. This rate is determined using the BOC’s five-year benchmark rate and the interest rate offered by the lender plus 2%, whichever is higher. Today’s benchmark rate is 5.25% and has been so for quite some time.
Let’s use an example to help put things in perspective.
On February 1 of this year, if you applied for a mortgage of $700,000, the qualifying rate was at 5.25%, resulting in a qualifying payment of $4,171 per month. This is the amount you were required to qualify for – in other words, be able to pay – but not the actual amount of your monthly mortgage payments. It’s like building in a buffer.
The interest rate at that time was 2.94% (with a 25-year amortization on a 5-year fixed term), making your actual monthly payments $3,291.
The interest rate of 2.94% + 2% = 4.94%, was less that the qualifying rate of 5.25%, which is why you had to qualify using the higher of the two.
It’s confusing… we know! But bear with us and we’ll try to help make sense of it.
This identical scenario today would look like this:
The interest rate is now 3.84%. So if we add 2% to that, we get a qualifying rate of 5.84%. That is higher than the BOC’s benchmark rate of 5.25%.
Therefore, that same $700,000 mortgage would require a qualifying monthly payment of $4,412, and an actual monthly payment of $3,621.
Translation: The real impact this has on one’s monthly payment is an increase of $330 per month over the actual payment required at the 2.94% rate, which isn’t necessarily the end of the world for many people who qualify in this price range.
We were pleasantly reassured to learn this after speaking with our mortgage expert. Sometimes the headlines can scare us and cause us to jump to conclusions, but once we look more carefully at the details, we realize that things may not be so bad after all.
The value of an average home in the West Island is now hovering somewhere in the range of $700,000-$800,000. We believe that most home buyers and homeowners who could qualify in this price range a few months ago will most likely still qualify at the higher rates, as the difference is only a few hundred dollars a month. The same could be said about existing homeowners who may need to renew their mortgage at these higher rates.
However, when you combine this with the rising prices of a great many other commodities, these little increases do add up, and that’s where we can potentially see this having an impact in the future.
If you or anyone you know is looking for some advice or guidance regarding real estate in the West Island, please don’t hesitate to contact Team Broady at 514-613-2988 or email@example.com.