The Bank of Canada raised their key lending rate by 25 basis points today. This is the first rate increase in nearly seven years after we have progressively seen the rates drop to their current level of 0.5%. This announcement will have an effect on the real estate market and it is important that you know how the Bank of Canada interest rate change will affect your personal situation.
The changes are both a gift and a curse for you. On the one hand, you will likely be paying 0.25% more on either a variable or fixed rate mortgage as a result of the Bank of Canada interest rate changes. On the plus side, this will likely further impact housing prices and as a result you would be purchasing a property for less than you would be today and would likely end up in a relatively cash neutral situation and overall, be facilitating less debt.
To keep numbers simple let’s assume a $400,000 purchase with 5% down (not including any CMHC premiums) which gives you a $380,000 mortgage.
On a $380,000 mortgage amortized over 25 years at 2.5% interest you would be paying $1,702.28 per month. Using that same mortgage amount at 2.75% interest, you would be paying $1,749.95. That is an additional $47.67 per month in costs if lenders raise their rates along with the Bank of Canada interest rate.
Now, let us factor in the current state of the real estate market in much of the GTA and assume this announcement could affect pricing by a modest 3.5%. You would be bringing the amount of your overall mortgage down to $366,700 and your monthly payment would be $1,688.70, which is actually lower than the current rates at the existing price point of a house. Take into account you are facilitating less debt overall and I would consider that a win.
Existing Home Owners With Variable Rate Mortgages:
You have enjoyed the wave of low interest rates for a long time but the party is over… or at least changing. The Bank of Canada interest rate change will automatically impact what you are paying monthly.
If you are locked into a prime minus variable, while you will be paying more, you will likely still be paying less than what fixed rate mortgages are but you will still need to account for the added cost in monthly payments.
If you have a variable rate mortgage set at the prime rate, you would be paying slightly more than what a five year fixed rate cost would be. If you are in this product, I would suggest locking yourself into a 5 year fixed term mortgage OR consider a blended mortgage that is part variable, part fixed rate.
Existing Home Owners With a HELOC:
Home equity line of credits are a very popular model but they will also feel the impact of a Bank of Canada interest rate change. Similar to a variable mortgage, these rates will increase.
Most people on HELOC have payments coming directly out of their personal account so I would suggest monitoring this so you know how much more you are paying monthly. If you have money sitting in your personal account OR have investments that are not providing a return of at least 4% I would suggest paying down your HELOC as it does have the distinct benefit of being able to deposit and take out funds at your convenience.
The results of the Bank of Canada interest rate change will impact you as well. Buyers are already on the fence because of the government’s plan to cool the housing market and adding to their monthly carrying costs will not help matters any further.
As a seller, you are either in the market, on the market or ahead of the market and if you truly want to sell your home, you need to be ahead of the market. To do this, you can factor in the monthly cost increase to a buyer when deciding on a listing price. If they are able to remain cash neutral, then your home will stand out above others as it would be more affordable.
You also want to consider where you are buying as this could be an exceptional opportunity. If you are moving up within the same area, you will be purchasing for less overall and if you are moving out of your existing market to a smaller centre, you will also benefit from a price drop and really it is an apples to apples scenario, what you lose on one end you gain on the other.
The only home sellers who would be negatively impacted are those who are not going to be purchasing another home and did not take advantage of the record high pricing. It’s no time to feel sorry for yourself about “what if’s” and really is the time to kick it into high gear and prevent yourself from losing any more of your equity by making the decision to sell sooner than later.
It is an interesting time in real estate right now and the results of the Bank of Canada interest rate change will have an impact that will be felt in real estate and only time will tell what exactly that entails. It is important that you are fully aware and up to date with what is going on and how it impacts your personal situation and make choices which will ultimately create the best scenario for you.
We hope you enjoyed this post and if you have any questions about how the Bank of Canada interest rate will affect you. We have several customized services for buyers as well as customized services for sellers that will assist you in navigating through these changes OR you can fill out our form below and we will be happy to have a discussion with you.