From personal loans to mortgages, simply put, it’s now more expensive and more difficult for Canadians to borrow money.
At the beginning of 2018, new mortgage rules raised the bar for qualification. Under federal law, all financial institutions are now required to put any new applicants under a strict “stress test”, regardless of their down payment amount. Borrowers have to prove they can still make payments at the greater of two options: either the five-year benchmark rate published by the Bank of Canada (currently 5.34 per cent), or the contractual mortgage rate plus two percentage points. Otherwise, those borrowers will not qualify for a mortgage.
And in recent news, the Bank of Canada raised its overnight lending rate to the highest level in almost ten years; the target is now 1.5 per cent. Commercial banks responded right away by raising their prime rate to 3.7 per cent. This means if you have a variable rate mortgage or have borrowed money from a line of credit, it is going to get more expensive to service.
Here’s a good example. Let’s say you have:
- a variable rate mortgage set at prime, with no discount,
- an outstanding balance of $400,000,
- and 23 years remaining.
In this case, your monthly payments will jump from $2096.35 to $2127.54. That is more than $372 per year in payments you will now owe to the bank.
Buyers may be enjoying lower home prices, but reports say they will rebound by end of year
In addition, those hoping to buy a home will be affected by the Bank of Canada’s decision, as they now have to show they can afford to make payments at a higher rate.
The good news for home buyers is that home prices have softened over the last six months. New rules and higher borrowing costs have led to less competition in the market, as home buyers can’t afford to spend as much. While 2017 saw red hot markets and little supply, less demand now has caused prices nationwide to decrease. In June, the Canadian Real Estate Association (CREA) reported that national prices dropped by 1.3 per cent on average year-over-year.
But a new report by Royal LePage says home prices will increase in the last half of 2018. Called Expect an Uptick in National Home Prices Next Quarter Following Sluggish First Half of 2018, it states, “looking ahead, Royal LePage is projecting an uptick in home price appreciation in the third quarter and forecasts that the aggregate price of a home in Canada will increase 1.9 per cent over the next three months.”
“It was a spring market that never blossomed,” says Phil Soper, president and CEO, Royal LePage. He adds, “The market has begun to absorb and adjust to the new realities; we expect an uptick in sales volumes and prices during the second half of 2018.”
Soper continued, “The fundamentals have not changed. The economy is strong and unemployment is very low. We face shortages in our major cities, with many more people looking for homes than the market has available for purchase or rent. Upward pressure on prices will likely return to most markets during the third quarter.”
For home owners worried about their home values falling, this forecast is good news. But despite what Royal Lepage says, generally speaking, home prices fall when interest rates rise. So Canadian home owners should be prepared.
Advice to Canadians: Continue saving, as you’ll now qualify for much less
A new CIBC Economics report took a look into the factors that affect Canadian household spending and savings, and in many cases, Canadians have felt “richer” as of recent because of rising home values, and not necessarily because they’re putting more of their paycheques away. The report says we are less motivated to save our cash when our assets are rising.
The report mentions, “In reality, saving is not only about putting money aside, it’s also about capital appreciation. After all, if the existing investment pie is growing nicely, one is less motivated to compromise his/her current standard of living in order to save.”
As rates rise, Canadian home owners and those saving to buy a house should adjust their expectations. Money will cost more as rate rise, and new rules mean you will qualify for less. In cities like Toronto and Vancouver, prices may fall more as they have risen dramatically over the last 10 years. The best move from a personal finance perspective is to pay loans down more aggressively. Take advantage of this still low-rate environment before the Bank of Canada raises rates again, because the Bank has hinted at more increases in the near future if the economy continues to improve.