Bank of Canada increases its benchmark rate
All six big Canadian banks raised their rates in the past weeks. Find out how it can affect you.
The Central Bank’s five-year mortgage rate jumped from 5.14% to 5.34% last week. All six big Canadian banks raised their rates in the past weeks as well. The Central bank qualifying rate is different from mortgage rates that banks offer to their clients. It is used to assess financial capabilities of home buyers who are looking to get a loan.
The effect of the new rules on the housing market
New mortgage rules introduced earlier this year ensure that all borrowers must pass a stress test before qualifying for a mortgage. Previously only borrowers with less than 20 per cent down payment had to go through the hassle. As of January 1st 2018 all borrowers are required to prove that they would be able to withstand rate increase, and keep making their mortgage payments. All borrowers are required to show that they can pay interest rate greater than central bank five-year benchmark, or rate two per cent higher than their rate agreement.
New stress test introduced in January 2018
New rules were intended to reduce risks associated with increasing amount of debt and rising housing prices. Many borrowers were able to qualify for much lower amounts than they expected, after the introduction of the new regulatory changes. This definitely had some consequences for the housing market with home purchases, renewals and refinances. According to a new report, 47 per cent of all mortgages will need to be refinanced this year. This number is very high compared with the typical 25 to 35 per cent range that we’ve seen in previous years. Many borrowers would not be able to purchase the home of their dreams, and would have to settle for less expensive home or save additional funds in order to pass the stress test. Last month all five of the big Canadian banks raised their benchmark rate in order to manage “competitive landscape, the cost of lending, and managing risk”. TD bank was the first to raise its benchmark from 5.14% to 5.59%. RBC, CIBC, National bank of Canada, Bank of Montreal and the Bank of Nova Scotia followed with rate adjustments.
For example, borrowers who qualified for $500,000 mortgage several weeks ago, now would only get $480,000. More adjustments would need to be made by some to meet the regulatory criteria. This is a difficult time for many borrowers, but do not get discouraged. We will keep you up to date with the changes. We have access to some options and rates that many other lenders don’t have. Do not hesitate to contact us for mortgage help and advice.
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