The year 2022 has been filled with real estate and cnews. After two years of unprecedented low rates, the Bank of Canada began raising the key overnight rate in March. Between March and June, fixed-rate mortgages jumped by 66% on average. In July, the Bank of Canada stated that it would raise the benchmark overnight rate by 100 basis points, from 1.5 % to 2.5 %. This is the largest increase in the interest rate since 1998! The Bank of Canada is demonstrating its willingness to battle inflation strongly with such a large rate increase. The Bank has stated that more rate hikes will be implemented this year until inflation finally begins to decline.
How Do These Mortgage Rates Affect You?
If you have a mortgage with a variable interest rate or a home equity line of credit (HELOC), your rate will increase proportionally. You need to do the math to figure out how much your new payment will be at the increased rate, and you should also prepare your finances for other rate increases this year. Using any mortgage payment calculator, you may simulate various mortgage scenarios. If you need expert assistance on how to manage today’s increasing rate environment, please contact us right now.
If you have a fixed-rate mortgage, this announcement will not affect you until your mortgage is due for renewal. If your renewal date is approaching, you should begin calculating your payments based on today’s higher rates.
If you’re in the market for a new home, make sure to look into the best mortgage rates in Canada and get pre-approved to lock in today’s mortgage rates for up to 120 days.
How To Qualify For A Mortgage?
Remember that if interest rates increase, so will the stress test. If you’re planning to buy a house, you should run a couple of different stress test simulations to adjust for both this rate rise and future rate increases through 2022. Any mortgage application, whether for a fixed- or adjustable-rate loan, will undergo a “stress test” at a rate 2% higher than the contract rate. Since variable rates are still lower than fixed rates, you will be eligible for more if you choose a variable rate. Since variable-rate mortgages are flexible, you can convert them to fixed-rate mortgages at any point after closing.
Changes To Your Stress Test And Mortgage Payments
If you have a mortgage with a variable rate or a home equity line of credit, your monthly mortgage payment will go up almost immediately. Here’s an example of a calculation:
The Greater Toronto mortgage payment calculator estimates that a 10% down payment on a $711,000 house with a 5-year variable rate of 2.50% amortized over 25 years (total mortgage amount: $659,737) and a monthly payment of $2,955 (the average home price in Canada in April 2022 was $711,316, according to CREA). Your variable mortgage rate will go up to 3.50% today, which means your monthly payment will go up to $3,294 as a result of an increase of 100 basis points in the rate. Your mortgage payments will increase by $339 each month, which is equal to an additional $4,068 over a year.
Summary
With recent record high-interest rate increases and other rate hikes on the horizon, it is normal to feel a degree of uncertainty. Whatever your mortgage situation is, if you need experienced assistance on how to navigate today’s rising rate market, please call our Greater Toronto Mortgages team. They may walk you through various mortgage scenarios and provide tailored advice at no cost to you. Contact us right now!
