Interest Rate goes up adding to homebuyers’ challenges, more first-time buyers will not qualify

The interest rate up and third Bank of Canada rate hike this year could shut more first-time buyers out of the Toronto region’s housing market. It will increase hundreds of dollars to some homeowners’ challenge mortgage payments. More first-time buyers may not qualify for mortgage.

The central bank has raised its key lending rate 0.25 to 1.75 per cent on October 24, 2018. Similarly, Canada’s big banks boost their prime rates by a quarter of a percentage point to 3.95 per cent from 3.70 per cent, effective October 25. The bank previously raised rates by 0.25 percentage points on Jan. 17 and July 11.

Variable loan rates are expected to rise accordingly, adding to the carrying costs for the 32 per cent of homeowners who have non-fixed mortgages.

Online mortgage site Ratehub.ca calculated that consumers who put 10 per cent down on an $800,000 home with a 25-year amortization would pay an additional $283 per month in interest if, as expected, their mortgage rate climbs to 3.19 per cent from the pre-Jan. 17 rate of 2.44 per cent.

That means those homeowners that started the year with a $3,303 monthly payment, will likely end 2018 at $3,586 a month.

The average cost of a Toronto-area home — including detached, semi-detached, townhouses and condos — was $796,786 in September, according to the Toronto Real Estate Board.

Millennials, new Canadians and self-employed workers are struggling to qualify for a home loan due to several reasons, The house prices increased more than hundred percent (100%) in five (5) and a mortgage stress test requires buyers to qualify for financing at the Bank of Canada’s five-year benchmark rate or at 2 per cent higher than the rate they negotiate with the bank, whichever is higher.

This stress test is believed to reduce consumers’ home-buying power by 20 per cent. But the Bank of Canada has credited new mortgage rules as a factor in reducing the number of highly indebted Canadian households.

“The stress test ensures consumers can absorb at least a 2 per cent rise in rates by the time they renew (their mortgage). So I feel good about our regulatory environment and its ability to ensure that only Canadians who are financially able are purchasing homes,” Laird said.

The buyers may opt for variable interest rate for their qualifying mortgage. The average fixed interest rate on October 24, 2018 was 3.50 per cent whereas 2.75 per cent as the average variable interest rate.

“We need three (3) or four (4) more rate hikes for the variable rate you can get today to exceed the fixed rate you can get today,” Laird said.

According to analysts, the Bank of Canada may increase bank rates a few more times in later part of 2018 and in 2019. The bank rate may increase from 1.75% as of October 24, 2018 to somewhere in between 2.25% to 3.25% in 2019.

Source: Toronto Star

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