What the recent rate hike could mean for you

Getting a mortgage this year will be more difficult – and pricier – than it would have been just a few short months ago. Here’s what potential buyers need to know.

Rates are on the rise. The Bank of Canada announced an increase to its target interest rate on Jan. 17, hiking it 25 basis points to 1.25 per cent, citing strong economic data.

“In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated three per cent in 2017,” the Bank said. “Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.”

The country’s largest banks – RBC, CIBC, Scotiabank, and TD – correspondingly increased their prime lending rates by 25 basis points to 3.45 per cent.

Why should homebuyers care?

Whenever the Bank of Canada tweaks its policy rate, banks incorporate the change into their prime rates; and prime rates have a major impact on variable rate mortgages.

So the best five-year variable rate mortgage in Ontario now sits at 2.20 per cent (prime less 1.25 per cent) – an increase of 25 basis points over the previous lowest rate just prior to the Bank of Canada’s rate hike.

But what about fixed rates?

They’re also increasing. The bond market – which banks use to price their fixed rate mortgages – has been inching higher recently due to Canada’s improving economic outlook. Bond yields are expected to enjoy even greater gains following the Bank of Canada’s rate decision.

So, the best available five-year fixed rate available in Ontario is now 2.94 per cent as of Jan. 19, 2018 – up from 2.79 per cent a day prior to the Bank’s rate hike. This means pricier mortgages.

Let’s dig into the math

The average home price in Canada sold for $496,500 in December 2017, according to the Canadian Real Estate Association.

Assuming a down payment of 20 per cent, and a mortgage amortized over 25 years, let’s look at what mortgage payments would cost before and after the latest rate increase.

Today, the monthly payments – assuming a buyer qualifies for the lowest available fixed mortgage rate – would be $1,868. That same home would have cost $1,837 just one week earlier.

An increase of $31 per month or $372 per year. Not the most unmanageable price increase, but a price increase nonetheless. However, those looking to buy shouldn’t be too put off by the rate increase – we’re still in what is considered a record-low rate environment. You may, however, want to speak with a lender or mortgage broker to get a pre-approval, which would allow them to lock in a rate for up to 120 days and protect them against any further rate increases within that timeframe.

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