2022 is one of those years where interest rates are dominating the news.
While I’m always a fan of being informed, the type of news I see out there today is quite alarmist. Headlines of people losing their homes or being forced to sell? Bad news sells.
But here’s the thing. Rates are cyclical.
Rates go up and rates go down.
What we’re experiencing now is the upwards cycle, especially with The Bank of Canada (BoC) rate hike of 1% in its policy rate on July 13.
For the last several years, we’ve enjoyed a really low rate environment, especially during COVID hit rates hit the record lows.
Why this feels so doom and gloom is because of our current inflationary environment. We feel the pressure on all sides now, from the goods we buy to the interest we’re paying to buy those goods.
There’s also a lot of fear because I know there are a few people out there who remember the interest rates of the 80’s…I’ve had a few calls about that.
But, I can confidently say, rates aren’t going there.
If anything, we’re going to levels slightly higher than pre-COVID, between 2% - 4%.
What Does This Mean For You?
In layman’s terms, this means if you have a variable rate mortgage, or any type of loan or line of credit that floats with the Prime rate, your rate is about to increase by 1%.
If you have a variable rate mortgage, it means you’ll soon be receiving a communication from your lender telling you your payment is going to change.
Of course, that depends on a few factors.
An average variable rate mortgage of $350,000 on a 25-year amortization will see about a $185 increase in their payment.
The Effect to Home Prices
There’s a secondary result to this announcement that affects homeowners whether they have a variable or fixed rate mortgage which is the value of your home.
We have already started to see how rising fixed rates have started to cool down the real estate market, especially in the red-hot markets of Vancouver, Victoria, Montreal, and all of Southern Ontario.
Now with variable rates becoming more expensive, buyers may be waiting to buy until rates are more in their favour.
However, increasing rates change the qualifying rate we as brokers are required to use to qualify our clients. Prior to July, we were qualifying people at 5.25%. Now, we’re qualifying people around 7%.
Being able to qualify for less of a mortgage will inevitably soften housing prices as well.
What Was the Bank Thinking?
Well first the Canadian government for the most part is ‘OK’ with cooling the housing market.
The market was becoming unsustainable. In the long run this might not be a bad thing. The Bank had the foresight to mandate us to start qualifying our clients at a much higher rate a few years ago in anticipation of this.
For many of you, whether you know it or not, I’ve already made sure your income could support these rate hikes.
Secondly, and quite frankly the Bank had no other choice.
The government only has one trick up its sleeve for rapid inflation, and that’s to hike interest rates. The move by The Bank is to bring down the price of goods. It’s the only real action they can take to get control of inflation so we’re not paying more for groceries and gas.
The latest increase was more than most experts predicted, but we were going to get there at the next BoC rate announcement in September anyway.
So, What Do You Do?
Well as always, if you have a variable rate mortgage you can explore the option to
lock into a fixed rate. But, they have been rising for most of the year and you’re still better off weathering the storm in a variable type of product.
But there are more hikes coming, so it’s worth a conversation about what your options are.
You can also look at this as an opportunity.
In many markets, the real estate market had become completely insane. A dozen offers on a property with the final price being several hundred thousand over list price? That’s ridiculous.
Now with prices easing, it might be a time to think about buying again or looking into a rental or vacation property.
Your payment will be more than it would have been earlier in the year, but in the long term game, starting with a lower purchase price is always more beneficial than having to ride out a couple years of higher rates until inflation is under control.
These are complicated scenarios, with complicated answers, so as always talk to the people you trust the most in real estate, accounting, and finance to figure out what’s best for you.