Canada

Small Rate Hike, Big Impact On Canadian Real Estate Buyers

Small Rate Hike, Big Impact On Canadian Real Estate Buyers

Canadian real estate buyers got hit with another quiet hurdle last week. The Bank of Canada (BoC) raised interest rates, and with it, up went the posted 5 year mortgage rate. Here’s how that’s going to impact your borrowing patterns, and how much more it’s going to cost you.

Bank of Canada’s 5 Year Rate Rises To 5.14%

The increase of interest rates generally leads to a rise in the BoC’s posted mortgage rate, but the full increase isn’t always passed on. The overnight interest rate increased by 0.25 percentage points, but 5 year conventional was only hiked by 0.15 percentage points. This brings the 5 year conventional to 5.14%, which doesn’t seem that high. However, the hike does hit potential homebuyers in a couple of ways.

That Small Hike Reduces Borrowing Power By Over 1.6%

The small hike does translate to a significant reduction in borrowing power, sometimes called “affordability.” The hike from 4.99% to 5.14% reduces borrowing power by about 1.68%. For example, a household earning $100,000 at a rate of 4.99%, would have been able to borrow ~$534,594 for a mortgage. The new hike to 5.14% would mean that same household would only be able to borrow $525,577. The $9,017 decline is just one of the hurdles, that are going to get worse with higher rates.

How That Translates To Real Prices

The amount of interest paid is also increases significantly. The Canadian Real Estate Association (CREA) published a composite aggregate benchmark price of $600,300 in December. A composite aggregate benchmark is the price of a typical home across Canada, for those that don’t know. Let’s use that as an example of the extra expense incurred with the hike.

On a conventional mortgage, you would need to put 20% down. This brings the mortgage size on a typical home to $480,240. If you get a fixed rate mortgage just a couple of weeks ago at 4.99%, you will have paid $446,795 in interest over 30 years, on top of the purchase price. At 5.15%, the interest paid over 30 years would jump to $462,700. That’s $15,905 more expensive, for the same home. Now most of you would be paying lower than the BoC’s 5 year mortgage rate, but ideally it averages out around here, after rates are done climbing. Although it can get more or less expensive, depending on how rates change in the future.

Low interest rates are soon to be a thing of the past, which will have an interesting impact on the home buying market. Borrowers, who were already hit with a stress test this year, will have their borrowing power reduced. This could increase the number of people that would have been eliminated by the stress test. On the flip side, rising rates could inspire more home buyers to try and close a fixed rate as soon as possible. The market is currently anticipating two more rate hikes this year, which means an even larger reduction to mortgage borrowing room, and even more spent on interest rates. How do you think this will shake out? Leave your comments below.

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22 Comments

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  • Michael 10 months ago

    ooo… will buyers take the low interest rates, or wait and see what’s in the box? Canadian real estate is officially a reality show.

  • David Z. 10 months ago

    People should be buying right now, or forever be locked out of the market. Return to nominal interest rates means people will be paying off multiples of their home. Buying now ensures they can close the lowest rates, at the most they’ve borrow.

    • Ham 10 months ago

      Sounds like a realestate agent/mortgage broker giving terrible “advice”.

      Do not ever listen to people who has something to sell you.

      • bluetheimpala 10 months ago

        Don’t feed the trolls.

      • John 10 months ago

        Agreed, don’t feed the trolls. But let’s explain why this is bad advice.

        Your typical mortgage these days is for 25 years, but your interest rate is re-evaluated typically every 5 years (though other options exist for both time frames).

        So ‘locking in’ today’s interest rate could save you today, but if the market turns down and interest rates rise further, it could hurt you in 5 years.

    • David 10 months ago

      Interest rates and house prices have a historically negative correlation. Why should people rush to get in now to beat rising rates, just to see their homes drop in value? On top of rising rates, it was unwavering faith in RE appreciation that drove speculators into the market to run up prices even faster, and it will be RE prices dropping that will cause them to make for the exits, causing a similar but downward pressure on prices.

      Do NOT buy right now. The patient will be rewarded.

      • JJ 10 months ago

        I’m totally with you. This is a wait and see market. It doesn’t seem prudent to speculate when risk is so high. Sentiment seems to be changing slowly. There is definite unease out there. Way less people are bragging to me about their latest RE plays.

    • Terry 10 months ago

      People should buy they can afford and compare the cost of ownership to the cost of rent. Except for principal payments, which is a form of forced saving, both are dead money.

  • Investor 10 months ago

    Everyone is going to feel the pinch; whether you’re buying a home newly, borrowing to invest in a wide range of things. Interest rates have already gone up in line of credits across the board.

    The banks are the only ones rejoicing. No matter what happens, they’ll still make their record profits – and I’m not against them turning profit to stay in business. It’s just weird that when interest rates are low, home prices creep up to replicate the profits the banks were used to making. On the other hand, if interest rates increase, the banks ain’t losing either, even if home prices drop a bit. Consumers are always on the hook.

    • Torb 10 months ago

      The whole country is a great setup for banks. Rates go down, prices go up. They make more money. Rates go up, the charge existing clients more. They make more money. Housing market crashes, the homes are insured. They make the same money, taxpayers get squeezed.

      It’s almost like they have no incentive to control risk. 🙄

      • Neo 10 months ago

        B20 is about OFSI protecting banks as well. They were finding too many mortgages were avoiding insurance due to bank of Mom who couldn’t truly afford the house they were buying. Can’t have a bunch of shaky loans bank balance sheets uninsured can we.

    • Raging Ranter 10 months ago

      It’s not weird at all. Home prices go up because borrowing costs go down. Period. Banks don’t do that. Homebuyers do.

      Also, banks DO NOT benefit from higher rates. They need to raise money in the bond markets to cover their mortgages. That means they pay more interest at one end and charge more at the other. The spread does tend to increase when rates are higher, but that’s only because risks tend to increase with higher rates, while loan volumes tend to fall. The result is less profit for banks, not more.

      Now before I get a response accusing me of defending the banks, let me say that I don’t give a shit about the banks profits. I currently have a short position on CIBC and TD (put options). That’s how convinced I am that higher rates – coupled with record consumer debt loads – are not good for them.

      My wife used to work at one of the Big 5, and it was a hellish place to work, as her entire job was pushing more debt on people while convincing them that it was in their best interest. The customers were their own worst enemies, and they never ever refused more credit. She was very stressed about it and ultimately quit because of it. That was way back in 2012. Their practices have not changed, as was highlighted earlier this year in a series of CBC investigative reports. They are going to pay for that practice at some point. And it was lower rates that allowed them to play the game for so long.

      That’s exactly why I want to see rates go up – a lot. Banks can’t push debt on people the same way when rates are higher. The risk is too high, and people can’t afford it. Also, higher rates will pinch their bottom line and hopefully boost my own by dropping their share value. There’s always a self-interest angle eh? 🙂

    • Scott MacKinnon 10 months ago

      You are right. The banks win again. The solution would be for the federal government to open up the banking system to foreign competition.

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  • Justin Thyme 10 months ago

    It is reasonable to assume that the rush-to-buy bump in December before rates go up will be reflected in a lowering of sales in February in regression-towards-the-mean fashion.

    But his decline could turn into a route, if it scars others away. Buying a house for a homeowner is usually an emotional decision, and humans are a herd animal.

    Since most smart money has left the market, that leaves primarily the emotional buyer.

    It will be very difficult for realtors to deflect the stampede. I would NOT want to be someone standing in front of it.

    • bluetheimpala 10 months ago

      It is reasonable to assume Canadians are becoming more desperate and willing to trade their future for some semblance of short-term normalcy which was only within reach a generation ago. The core of our society has been picked apart over the last 20 years. Basic households requiring dual income, child care costs, hours spent at work, older generations pulling $$ forward, FOMO mentality, consumer goods pricing, wage stagnation, pensions/retirement, wealth disparity, access to medical/public services, access to clean water…in general, the only perceived improvement, in my mind, is the bells & whistle of technology and, debatably access to information. Slow clap…great. I can have my kids raised by a someone else while we both work to pay for our massive mortgage and car payments, eek out some fun here and there and then work to pay it off, in between paying for RESPs so my children can maybe have a better life, savings are non-existent but at least I have my piggy bank that I can cash out when I’m 70 and live the last 15 years of of my life thankful I’m not on the streets.

      INB4 someone says the above was a ‘free ride’ and an example of society being bloated and inefficient. Capitalism works and if people like Blue just ‘worked harder and stopped complaining like a little bitch’ everyone could have the American dream…oh wait, this isn’t america. It’s not my dream.

      BD4L

      • Justin Thyme 10 months ago

        It’s called ‘regression towards the mean’. Beginning in the 80’s, kids EXPECTED to adopt the lifestyle of their parents. They had no concept of ‘starting out’. They wanted exactly the same style of house as their parents, the middle class dream. This became the expectation through the 90’s, and the 2000’s. It was impossible to maintain. It is not FOMO, it is ‘not expecting to miss out’.

        So, now we have returned to normal, the mean, but we have forgotten what ‘normal’ is.

        Youth, once more, have to ‘start out’, the same as they have had to for centuries upon centuries upon centuries. (Unless they were entitled, and then it was primarily the senior male who inherited control).

        It took several generations to get out of kilter, it will be interesting to find out how many generations it will take to get back to normal.

  • Raging Ranter 10 months ago

    Anyone want to know how bad it can get? Here’s an excerpt from a letter to the editor written by a realtor, published in Macleans magazine in a January 1996 issue. The theme of the preceding issue was how tough the 1990s economy had been so far. The letter was in response to that.

    “I used to take genuine pleasure in bringing buyers and sellers together. Now, in the 90s, fully 50 per cent of my transactions involve sellers just trying to get their equity out before the bank forecloses, and in most cases, they lose some of that equity. My income in 1995 was comparable to other years, but it’s how I had to make my income that keeps me up at night.”

    Given that household debt levels in the mid-90s were only half what they are now (as a percentage of income), I’m guessing that there’s a good chance such conditions could return. Maybe not now, or next year, but sometime within the next few years. Those of us who have seen it before would never discount the possibility.

  • C 10 months ago

    The raise in interest rates should be cause for celebration–by everyone, and not just me. Rising rates are only an issue for the over-leaveraged, and if you can’t handle a quarter percent rise in interest rates, then you should absolutely zero debt.
    People taking out large mortgages today, and complaint about near zero interest rates, is laughable.
    If you can’t afford your life choices, pay off your debt. But most won’t. They will struggle and borrow and beg and steal, and eventually end up at with a consumer proposal or bankruptcy. A quarter percent interest rate is nothing, unless you have too much debt. Period.

    • Bluetheimpala 10 months ago

      Life happens and slowly unexpected hits add up. Car or house damage….heck, after I bought my house I had to drop $8000 on waterproofing because, life happens.
      5 years down the line you have $20,000 in credit card debt which can be a crushing debt load at 21% per annum. That’s the vicious cycle…everything is ok until it isn’t. Exuberance and cheap money have fuelled the best of times, now for the worst of times…

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