The real estate industry is abuzz and has been for many months now; Real Estate Professionals, Mortgage Brokers, and Banks are all uncertain of what will happen with our mortgage rates here in Canada. Will they increase like our neighbours down to the south who have seen 2-mortgage rate increases (4.04% and 4.24%) in the last couple of months?
I have a crazy idea: perhaps a mortgage rate increase(s) is really what the “MORTGAGE STRESS TEST “ rule that CMHC imposed is really all about. CMHC and The Bank of Canada are preparing millions of Canadians to pay more to get out of the cold. However, regardless of the reason, lately we have seen projections and have heard over and over that rates will be going up in the next year and a half.
The average 5-year mortgage rate is set by lenders at the bond rate plus a margin of 1.8%. Today, that rate would be 2.45%, which is pretty close to what most lenders are lending at (2.39% and 2.49%). When you account for the projected increase in the bond to 1.7% and then you tack on another 1.8%, we are now looking at a rate of 3.5%, which is close to a full 1% higher.
While this really does not sound like much, if you have similar payments as the test subject below, you will see what it means to you each month:
If you purchased your family home for $500,000 at today’s rate of 2.45% on a 25-year amortization, while also having a $350 a month car payment and be fortunate to not have any other debt you would need to earn $85,000 a year. This would make your monthly payment would be $2,195 per month. When you take into account the projected increase and use the rate of 3.45% your payment just got bumped up to $2,450 and your income now needs to be $95,000 a year. This is where you start crossing your fingers for that 10K raise!!
The reality is, is that we are in a really good market here in Regina with light inventory levels and an overall balanced market which we have not seen for 2-3 years; but if you are looking to buy, you may want to keep an eye on rates and pull the trigger before they do increase. On a last note about the stress test, I personally don’t believe that the stress test has crippled our market nor do I think it will. I also do not believe that you can just blanket the whole country with the same rules; these rules need to be provincial or regional.
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