In an effort to stabilize the economy and curtail rising inflation and hot housing markets, the Bank of Canada (BoC) has been steadily increasing interest rates – most recently on July 13th when the overnight rate rose a full percent, which was the fourth consecutive rise in rates and the largest single increase since 1998. 

While these increases may be necessary, they’re also making both the cost of living and borrowing more expensive, which means that, if you’re in the market to buy a home, your buying power will be reduced. 

But there’s also some good news for would-be buyers as rising rates have triggered a cooler market and subsequent decline in sale prices, as homes are less likely to sell for way more than asking like they were just a couple months ago thanks to bidding wars. 

Needless to say, the BoC’s decisions are also directly impacting mortgage rates – both fixed and variable. 

Fixed rates are linked to the bond market so, as bond rates have been going up, so too has the fixed cost of borrowing, including fixed-rate mortgages. With a fixed rate, mortgage payments remain the same over the length of the mortgage term so you won’t feel the impact unless your mortgage is up for renewal.

Conversely, variable rates fluctuate in conjunction with the BoC interest rate, which impacts bank prime rates. As interest rates continue to rise, so will your monthly mortgage payment. Nevertheless, variable rates continue to offer more flexibility and lower penalties than fixed rates, and remain the more affordable option. If you’re prepared to withstand the current increases and budget for eventual fluctuations, a variable rate option has appeal. 

Stress testing qualification protects borrowers from rising rates

Stress testing is designed to alleviate overheating housing markets and reduce risky borrowing by protecting consumers when interest rates rise. Under the stress test, borrowers are required to qualify at a higher interest rate than the actual rate they would be paying; currently the higher of 5.25% or your rate plus 2%. With many five-year fixed mortgages sitting around 5%, your qualifying rate would be closer to 7%. Since the stress test rate for a variable mortgage is lower, many borrowers are choosing a variable rate to maximize the amount for which they can qualify, even if they’re ultimately more comfortable with fixed. That said, the gap between the two rate types is closing. 

The country’s central bank has three remaining scheduled rate announcements for 2022, with the next one coming up on September 7th, and economists are predicting a further increase will accompany at least two – albeit perhaps at a slower pace if inflation starts to cool. 

Sooner or later, the BoC will need to hit pause on its upward trajectory and take stock of whether the progression of rate increases is producing its intended result, or if more persistent pressures are required. For now, borrowers should be prepared to ride out the swell. 

Have questions about your mortgage rate options or your mortgage in general? Answers are a call or email away!

 


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