BoC raises its mortgage rate

Bank’s number used to assess applications, increase will make it harder to get homes

First-time home buyers already struggling with more stringent mortgage rules have been dealt another blow by an increase this week in the Bank of Canada’s five-year mortgage rate.

The move is also one more reason why the Toronto region’s soft spring real estate market could linger longer, according to some.

On Wednesday, the Bank of Canada followed the country’s big banks and announced it was raising its 5.14-percent benchmark mortgage rate to 5.34 per cent. The central bank rate is different from the rates that banks offer consumers, but it’s used to assess mortgage applications.

Since Jan. 1, home buyers with a 20per-cent down payment have had to qualify at the central bank’s five-year rate or at two percentage points higher than the mortgage rate being offered by their bank.

That alone has diminished buying power by 16.5 per cent, according to a recent report by Royal LePage.

Higher fixed rate mortgages alone won’t be enough to cause a dramatic drop in activity, but it will reinforce the trend to longer commutes for more affordable homes and add demand to the already hot condo market, said Sotheby’s CEO Brad Henderson.

“We’re coming off a historic period where interest rates have been so low that homebuyers have enjoyed the ability to borrow vast amounts of money not only for home purchasers, but their lifestyles,” Henderson said.

“It’s just another small number of people who aren’t going to qualify for the mortgage they had hoped for and have to now explore some alternatives,” said Cynthia Holmes, chair of the real estate management department at the Ryerson’s Ted Rogers School of Management.

Those alternatives could include waiting longer to buy or turning to other lenders such as private companies or credit unions, which are provincially rather than federally regulated and therefore not bound to apply the stress test.

“That has no broad impact on the housing market, but it has an impact on our financial system,” Holmes said.

If interest rates rise this year, she added, it makes the stress test qualification more onerous and so the amount people qualify for will get smaller.

It will also affect consumers looking to renew their mortgages. Those home owners don’t have to qualify under the new stress tests if they stay with the same bank. But if they decide to shop around for a lower rate with another institution, they could have to qualify again with the stress tests, as well as higher rates, Holmes said.

“That means some people are holding a mortgage and they wouldn’t actually qualify for the mortgage they already have,” Holmes said.

The rate hike comes in a year when 47 per cent of all existing mortgages will be renewed, according to CIBC Capital Markets.

According to online financial hub, Ratehub Inc., the rate hike, coupled with the stress test, would mean a $9,000 difference on what a buyer can afford if that consumer has a $90,000 income and a 10-per-cent down payment amortized over 25 years.

That’s a $469,785 home at a rate of 3.09 per cent, versus a $460,852 home at the new qualifying rate of 5.34 per cent.

“It is hard to get people qualified,” said Sandra Barnes of Dominion Lending Centres.

“Qualifying at the benchmark rate and if you’ve got less than 20 per cent down, you have a 25-year amortization — that combination has really affected the first-time home buyer and their buying power,” Barnes said.

If a home buyer has 20 per cent down and they qualify at the benchmark, lenders can use a 30-year amortization.

Mortgage broker Samantha Brookes of Mortgages of Canada says she’s already seeing clients struggling under new higher rates as they try to renew their loans.

“A lot of people are literally on the brink of losing their home or having to sell,” she said, adding that she has advised some to consider the latter option because they have re-financed their homes to the point where they have no equity remaining.

“People have been using their homes as ATMs over the last few years because the market has been going up so quickly,” she said.

He says the cooling effect of higher interest rates on housing sales is undeniable and further possible rate increases will add to the malaise.

But this year’s dramatically reduced sales statistics look worse than they are on a yearover-year basis because sales and prices rose so high so fast in early 2017.

TD Bank was the first of the big five lenders to raise its fiveyear posted rate from 5.14 per cent to 5.59 per cent. It was followed by RBC, CIBC, national Bank of Canada, Bank of Montreal and Bank of Nova Scotia, which posted smaller rises.