bank of canada prime rate

Bank of Canada Interest Rate Good or Bad News for Real Estate Investors

Bank of Canada Interest Rate Good or Bad News for Real Estate Investors

The Bank of Canada increased it’s interest rate this week. Is this good news, or bad news for real estate investors?

Will You Qualify For A Mortgage?

For the last 2 months, 5 year fixed mortgage rates have increased from 2.89% to 3.69% and 10 year fixed mortgages from 3.69% to 4.19%.  Historically, a rapid increase in this short period is not typical.  On the other hand, the prime rate which is set by Bank of Canada's benchmark rate has been steady at 3% for 3 years now.  How will these rate movements affect one's ability to qualify for a mortgage?

Fixed Mortgages

The bond market (bond yields) drive fixed mortgage rates.  With better economic news and the US Federal reserve hinting towards slowing down the bond buying program, bond yields have spiked resulting in higher fixed mortgage rates.  Here is an example to show the impact of rising rates on mortgage qualification:

  • Household Income: $100,000
  • Property Tax: $4,000
  • Mortgage Amortization: 30 years*
  • At 2.89%: maximum mortgage $539,653, purchase price $674,566
  • At 3.69%: maximum mortgage is $488,576, purchase price $610,720
  • Reduction of $63,846 in purchase price

*Assume 20% downpayment is available in order to qualify mortgage at 30 year amortization

Variable Mortgages

Although prime rate has not moved in 3 years, the Minister of Finance changed the rules to require all variable mortgages and fixed mortgages of 4 year term or less to qualify using the posted 5 year rate (which has increased to 5.34%).  As fixed mortgage rates increase, the posted 5 year fixed rate increases which makes qualifying for variable mortgages difficult.

Using the same figures as the above example, here are the qualification results:

  • Household Income: $100,000
  • Property Tax: $4,000
  • Mortgage Amortization: 30 years*
  • Variable mortgage at Prime-0.4% qualified at 5.34%: maximum mortgage $403,915, purchase price $504,894

*Assume 20% downpayment is available in order to qualify mortgage at 30 year amortization

Based on the above, one can understand why more Canadians are choosing fixed mortgages over variable mortgages. I don't see how homeowners will qualify for variable mortgages when 5 year posted rate normalizes at 6%-6.5% level.

Real Estate Sales Numbers

As the latest real estate numbers show, Toronto house prices continue to appreciate with strong sales numbers.  This is good and bad for the following reasons:

  1. Consumers feel more confident as their home prices appreciate which leads to further spending and economic stimulus
  2. As consumer spending increases, debt levels increase which is one indicator the government of Canada is focused on slowing down
  3. As home prices continue to increase, it is more difficult to afford homes in Toronto without larger downpayments and/or gifted downpayments
  4. As home prices continue to rise, the government of Canada through OSFI (banks regulator) might introduce additional mortgage rules to slow down the real estate market and consumer debt levels. I would not be surprised to see conventional mortgages maximum amortization reduced to 25 years from 30 years and possibly increasing downpayment requirements to 25% from 20% for conventional mortgages.

Overwhelmed?  Don't worry, work with a knowledgeable mortgage professional to help guide you through the various mortgage qualification land mines.  If you are looking for a trustworthy, knowledgeable and experienced mortgage professional, please contact Nawar.

Home Buyers Videos Guide - Nawar Naji Toronto Mortgage Broker

Do US Elections Impact Canadian Mortgage Rates?

Over the last month or so, I have heard some mortgage brokers promoting the 4 year fixed rates to their clients since it coincides with the US presidential cycle based on the argument that in US election years, mortgage rates remain low for the incumbent President to be re-elected.  As a mortgage broker who is driven by data and facts, I had to do some research to justify these statements.Before we dive into data, let's understand what drives mortgage rates:

  • Fixed rates are driven by the bond market which moves up and down based on economic news. Good news drive the bond yields higher, therefore increasing rates and vice versa; bad economic news drive the bond yields lower therefore reducing fixed mortgage rates.
  • Variable mortgages are driven by prime rate which is set by the Bank of Canada (independent of government) and the discounts on prime are driven by liquidity and credit risk factors. In good times, variable mortgages were at prime-0.8%, during the financial meltdown of late 2008, variable mortgages were at prime+1%
Based on the above 2 points I don't see how US elections can drive the bond market or influence the decisions of the Bank of Canada.  The only connecting factor is the Bank of Canada benchmark rate has to remain relatively close to the US Federal Reserve benchmark rate.  If Canada's benchmark rate was much higher, the Canadian dollar would rise in value negatively affecting exports and would dampen the economy.

Let's look at the numbers.  Over the last 25 years, fixed rates on US re-election years: 2012, 2004, 1996 and 1988 the fixed rates based on the chart do not show a dip in these specific years.  The data shows that interest rates have been decreasing over the last 25 years.
Finally, when someone makes a statement, always ask for data to back up their claim. It's easy to make generic statements.
To discuss your mortgage situation and to make decisions based on data and facts, please contact me.