Today the Bank of Canada (BoC) announced a 1% rate hike to their policy interest rate from 1.5% to 2.5%, their largest hike in 24 years!
Sure, 2.5% doesn’t sound like much and I am sure someone will say that they knew someone in the 80s with a mortgage rate over 20% but in the 80’s most would probably argue that home ownership was much more attainable than it is today. Also this rate was just 0.25% back in January.
I am not going to try to explain what these rates are and how they work (if you want to understand that better, read this), but the main thing to know is that mortgage rates are actually much higher than the policy rate.
The current 5 year fixed mortgage rate is around 5%. If you got a mortgage in the last few years, you likely were able to get a rate somewhere between 1-3%. I managed to get a 5 year fixed at 2.14% just over a year ago. When you look at today’s average price of $1.14M, every 1% rate increase leads mortgage payments to increase by about $500/mth. So if someone bought a house back when I renewed my mortgage in mid 2019, they would have received a similar rate. Some people went fixed (locking that rate for a period of usually 5 years) while others went variable (meaning their rate fluctuates based the prime rate which is dictated by this overnight rate). So, with all the rate hikes that have happened so far this year, the average cost to buy the average home has risen by around $1500/mth assuming a fixed year mortgage. In addition, when someone goes to buy a home they have to qualify at 2% higher than the current mortgage rate due to the stress test, which means they are qualifying at rates over 7%. This is a good thing as it protects us from future rate rises and people being over leveraged, but it also means people can afford much less.
I know I have written way more than I was planning to on this, but in order to summarize what this means for the market I will break this down into the good and the bad.
The Good:
– This will help remove some of the speculation in the market that has been causing prices to go up unsustainably
– If you were a buyer thinking you got priced out earlier this year, that is changing
– If you are sitting on a lot of cash and won’t require a big mortgage there are plenty of deals to be found
– If you were looking to move up to a bigger home, the gap to do so will become much less
– If you take interest rates out of the equation, the underlying market fundamentals are quite good as there is still a housing shortage
– If you are on a fixed rate mortgage you don’t have to worry until you renew and they have already mentioned that they will likely bring rates back down once inflation is under control
The Bad:
– Housing could be the least of our concerns because if these rate increases keep continuing, people will be spending less everywhere and we will be pushed deeper into a recession
– If you own a property it is going to be worth less as further rate increases will likely put more downward pressure on pricing
– The Bank of Canada hinted this isn’t the end of the rate increases in their announcement
– If you are on a variable mortgage or have taken out a large HELOC, buckle up because it could get worse before it gets better
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