The Bank of Canada raised its overnight rate to 1.0 percent on Wednesday, September 6, 2017, up 25 basis points from 0.75 percent in mid-July. The overnight rate serves as a benchmark that banks and other financial institutions use to set their own interest rates for products such as consumer loans and mortgages.
While this is still an extremely low rate, this is the third increase that the Bank of Canada has made this year and analysts are forecasting a further increase by the end of the year as Canada’s economy continues to grow more broadly and become self-sustaining. The next scheduled date for the Bank of Canada to announce its overnight rate target is October 25, 2017.
What does this mean for mortgage rates?
Based on this increase from the Bank of Canada, The BC Real Estate Association (BCREA), upgraded its mortgage rate forecast stating, “…our projected rise in interest rates has occurred and accelerated.” In its Mortgage Rate Forecast for September 2017, the BCREA forecasts that a 5-year fixed mortgage rate offered by lenders will increase to an average 3.15 percent over the fourth quarter, eventually rising to 3.44 percent by the end of 2018.
The posted 5-year qualifying rate is forecast to reach 5.14 percent by the end of 2018.
What does this mean for you if you are a home buyer, owner or seller?
If you are looking to buy a home, or are renewing your mortgage, you can expect to see an increase in the variable and fixed-rates for mortgages. Homeowners who have a line of credit against their home (referred to as a Home Equity Line of Credit or HELOC) should also expect to see an increase in the interest rate. That’s because every time the Bank of Canada raises its overnight rate, lending institutions, such as banks and credit unions, typically pass them on to their borrowers.
According to local mortgage expert Dustan Woodhouse, the additional amount you will pay on your mortgage will be modest.
“A quarter-point interest rate movement represents $13 per month, per $100,000 mortgage, for the average mortgage holder. So that’s $52 bucks a month extra on the average $400,000 mortgage balance.”
Economist Tsur Somerville, who is an associate professor and holder of the Real Estate Foundation Professorship in Real Estate at the Sauder School of Business at UBC, gives his take on the interest rate increase and what it means to home buyers, owners and sellers in BC.
“If you have an adjustable rate mortgage, then your mortgage payments will be going up very, very soon. And if you’re on a fixed rate mortgage, it means that when you renew, you’re going to be looking at higher payments then.”
He adds first-time buyers will be most affected.
“Those are the people who are entering mortgages; they’re not carrying an existing mortgage. So, we would expect those to be the people who all of a sudden are looking at qualifying for a smaller mortgage and having higher payments on a mortgage than the existing amount.”
Somerville states that while the Bank of Canada hiking its trendsetting rate won’t alone make a huge impact, it’s part of a process that is increasing the cost to borrowers, which could dampen the real estate market.
” I think if we get a third and fourth hike, I think that a kind of accumulated pattern that starts to have an effect on people,” says Somerville. “Any one-off effect, the amount and payment is relatively small and you can sort of brush it all off. But when they start piling up, [it starts] making a difference.”
What is Bigtown’s take on interest rate increases
Mortgage rates are still very low based on historical averages and buying a home remains a good investment.
If you are a home buyer, or a homeowner, who is renewing your mortgage, you may want to consider taking out a fixed-rate mortgage of five years to protect yourself against further rate increases. And, of course, pay off your credit card debt as soon as possible as credit cards typically have much higher interest rates than do mortgages.
We also recommend getting pre-qualified for a mortgage and using the services of a mortgage broker. Banks and credit unions will often do a soft pre-qualification and will only provide a complete analysis once you have an accepted offer. Ask your lender if they will give you a pre-qualification certificate which guarantees your mortgage rate and amount for 90 to 120 days.
Mortgage brokers don’t charge for their services and they can search out a wide range of lending institutions and negotiate the best deal for you based on your financial circumstances. Most brokers will also do a financial check and pre-qualify you for an amount so you know your financial limit. Your Bigtown REALTOR® can supply you with the names of qualified mortgage brokers.
If you are a home buyer, the Bigtown Real Estate Team offer a comprehensive Buyer’s Program, Smart Buy which includes a step-by-step process to helping you find the right home, at a price you can afford.
For more information on our Buyer Program, Smart Buy, click here.
If you are considering selling your home, contact Bigtown for a complimentary home evaluation by filling out this form on our website or contact us at (604) 220-7358.