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:
- Consumers feel more confident as their home prices appreciate which leads to further spending and economic stimulus
- As consumer spending increases, debt levels increase which is one indicator the government of Canada is focused on slowing down
- As home prices continue to increase, it is more difficult to afford homes in Toronto without larger downpayments and/or gifted downpayments
- 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.
