Higher mortgage rates are also expected to weigh down home price growth
With the Bank of Canada’s latest 0.5% hike to its benchmark interest rate, the stress test for both insured and uninsured mortgages will most likely increase as well – and become another drag on Canadian home buyers’ purchasing power, according to Ratehub.ca.
“As expected, the bank increased the rate by a half point to 1%,” said James Laird, co-founder of Ratehub.ca and president of CanWise Financial. “Higher mortgage rates will put downward pressure on home prices across the country.”
Laird estimated that for each 1% increase to the stress test, affordability decreases by about 10%.
“Canadians with variable-rate mortgages and home equity lines of credit (HELOCs) will feel an immediate impact and can expect their lenders to increase their prime lending rates by 50 basis points in the coming days,” Laird said. “This group should budget for further rate increases throughout this year.”
Read more: Is Canada’s borrowing landscape set for dramatic change?
On the other hand, those who borrowed at fixed rates are expected to fare better.
“Households who currently have a fixed-rate mortgage will remain unaffected by this announcement until their term is up, at which point they should budget for higher monthly mortgage payments upon renewal,” Laird explained.
“The [BoC] has indicated that further rate increases should be expected. Therefore, Canadians shopping for a home should get pre-approved in order to hold today’s fixed rates for up to 120 days,” he suggested.
