Rate Hikes, Stress Tests and Buyers’ Affordability
Interest rate hikes is a story which the general public as well as people in the Real Estate industry feel is getting way, way old, none the less, on the 17th of January the Bank of Canada raised interest rates yet again by 0.25 percentage points, which translates into a 0.15% increase in the 5-year conventional mortgage, bringing it up to 5.14%. While the 0.15% increase might seem insignificant, it does have a substantial effect on potential homebuyers.
The seemingly insignificant increase will reduce borrowing power or the buyers “buying power’ by around 1.6. Numerically this means that at an interest rate of 4.99% a household with a yearly income of $100,000 would have been able to borrow approximately $534,594 for a mortgage. With that minor adjustment of the interest rate to 5.14% the same household would only get a $525,577 loan, which translates into a $9,017 decline.
This will also lead to an increase in the amount of interest paid. For instance, for a $600,300 house, in a conventional mortgage, which includes a 20% down payment, the typical borrower would get $480,240. At a 4.99% interest rate, the interest paid over 30 years would amount to $446,795. At 5.15% the interest paid increases to $462,700, which means the buyer would have to shell out an extra $15,905 for the same property.
A new change in January 1, 2018 took effect for buyers who are putting 20% down on their prospective homes. This was adorably dubbed the “stress test”. These potential buyers are being qualified at an inflated rate thus eliminating a substantial amount of their buying power. Buyers that putting lest than 20% down started feeling the effects of the stress test back early in 2017. Long and short, there is a feeling that this change will unnecessarily impair our housing markets coast to coast and prevent a large number of Canadians from achieving their housing goals. The worst part of this is that in turn, this may have an overall negative effect on their respective local economies as well.
The real estate market is anticipating two more possible rate hikes this year. In unfortunate news, this will ultimately end up reducing buyers’ purchasing power even more. On the bright side, this may also inspire more homebuyers to try and close in on a fixed rate as soon as possible. Sadly, with low interest rates soon to be a thing of the past here in Canada, and more and more good people’s buying power being stripped away the direction of our Canadian real estate market has become a hot topic so far early in 2018.
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