The Bank of Canada increases the overnight lending rate by 1% today. The largest increase in over 20 years. It is expected that banks, credit unions and monolines will increase their prime rate over the following weeks. This will increase the cost of variable rate (VRM) and adjustable rate (VRM) mortgages as well as home equity line of credits HELOC).

What does this cost you?

Homeowners with adjustable rate mortgages will see their payments increase by roughly $56/m/100k.

With nearly 25% of home buyers borrowing over $600,000 to buy a home in the last quarter of 2021 these increases represent a significant increase in the monthly cost of the average mortgage in Canada.

Borrowers who have variable rate mortgages will not see their payments increase but will have the debt they pay down with each mortgage payment reduced. (Such as TD/CIBC)

Those who took variable rate mortgages when the prime was 2.7% need to be aware as trigger points in their mortgages loom closer.

How does this impact qualifying for a mortgage?

These changes do not have a direct impact on fixed rates but bond yields (the primary driver of fixed rates) have been falling since they spiked in mid-June.

Anyone seeking a five-year fixed rate mortgage with any federally regulated lender (monolines and banks) has lost nearly 20% of their borrowing power due to the stress test since February 2022.

Due to the Bank of Canada increase, today borrowers will lose nearly 10% of their borrowing power on floating rate mortgages (ARM and VRM) as well as HELOCs.

What should you do?

We suggest that borrowers take a few steps to assess their next move that we can help with.

1) Complete a personal budget to determine how to maximize/protect your options

2) Work out at what interest rate you reach the limit of your maximum housing budget

3) Use this maximize allowable rate to determine if a fixed or floating rate option is best for you

4) Take action on any renewal in the next 12 months instead of waiting, September is expected to bring more increases.

What today’s rate increase means for the market?

At this point, there is no questioning the fact that rising interest rates have begun to impact the borrowing power of home buyers. The “stress test” is starting to force borrowers to consider between qualifying for larger mortgages with the uncertainty of variable rates or qualifying for less with the predictability of fixed-rate mortgages.

BC and Ontario are likely to be hit the hardest by these changes with these changes costing the average borrower over $25,000 over the next five years.

Lower price point markets may see an increase in demand as buyers consider more cost-effective options. The average mortgage size in Alberta is over 30% smaller than BC/Ont making for significant savings in mortgage costs.

If rates continue to rise and mortgage applicants continually qualify for less it seems logical that the housing market could fall in sync. With immigration expected and a housing building shortage that is still to be determined.

It will be interesting to see if policymakers begin to consider increasing maximum amortizations beyond 25/30 years to alleviate the rising cost of mortgages and offset the decline in borrowing power as discussed in the last election, while federal policymakers may have this in sight, please remember there are banks that do have 40-year mortgages and no stress test to help borrowers who need it.

Angela Calla is an 18-year award-winning woman of influence which sets her apart from the rest. Alongside her team, Angela passionately assists mortgage holders in acquiring the best possible mortgage. Through her presence on “The Mortgage Show” and through her best-selling book “The Mortgage Code“, Angela educates prospective home buyers by providing vital information on mortgages. 

In August of 2020, at the young age of 37, Angela surpassed $1 Billion dollars in funded personal mortgages. In light of this, her success awarded her with the 2020Business Leader of the Year Award.

Angela is a frequent go-to source for media and publishers across the country. For media interviews, speaking inquiries, or personal mortgage assistance, please contact Angela at hello@countoncalla.ca or at 604-802-3983.

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