Another Day, Another Rate Hike
The Bank of Canada has raised interest rates for the second time in less than two months. The central bank’s benchmark rate was raised twice by 0.25% since July and now stands at 1.00%. For consumers, this means the Prime Rate now stands at 3.20%. It was as low as 2.70% just a few months ago. With these increases Canada joins the U.S. as the only two G7 nations raising interest rates in an effort to help moderate our strong economic growth that surprisingly topped 4% last quarter.
Canada is in the middle of one of its strongest growth cycles since the 2008 recession, with economic expansion accelerating to an average of 3% over the past four quarters. According to the Bank’s press release, robust consumer spending, solid job and income growth, cooling housing markets, as well as more widespread strength in exports and business investment were all factors leading to this decision.
The rate increase works out to an extra $13 per $100,000 borrowed per month, approximately.
As Rates Rise, Clients Qualify For Less
What many people don’t realize is that as interest rates go up, qualifying for a mortgage becomes more difficult as lenders are required to qualify consumers based on a rate that is correlated to the Bank of Canada rate. As rates rise, clients qualify for less.
On top of rising rates, the Office of the Superintendent of Financial Institutions (OSFI) announced that it is considering requiring lenders to ‘stress test’ mortgage applications for buyers who have a 20% down payment or more. This would have a significant impact on a large segment of home buyers who would suddenly find themselves qualifying for approximately 20% less financing. For those living in areas with already record high housing prices, more people than ever will find it difficult to own a home.
Now, more than ever, it is imperative that clients engage the services of an experienced Mortgage Consultant to review their options before trying to purchase, sell, or refinance or renew.