Canada's Condominium Magazine

Bank of Canada raises rate 0.25 per cent: What does it mean to your mortgage?

As expected, the Bank of Canada raised rates for the first time in seven years to a key interest rate 0.75 percent. Although this is likely to have a slight dampening effect on markets already in “hold” mode due to the Ontario Government’s new rules, in real life its effect is negligible and can most likely be absorbed without difficulty into the market.

The average mortgage loan in Toronto area is $350,00. Even on a $500,000 five-year variable mortgage (25 years amortisation), the increase in payment would be around $100. Currently, variable rate loans, due to favourable interest rates, represent 30 percent of mortgages.

 

Bank of Canada Announcement of an increase in 0.25% to the base rate.

 

Bank of Canada Statement

In a statement, the Bank of Canada indicated that the Canadian economy is robust — due to personal spending increases. “As a result, a significant amount of economic slack has been absorbed,” and will be gone by year end.

 

RBC is indicated further hikes may come in incrementally as markets adjust, and assuming growth continues. RBC had already hiked their rates prior to the announcement. Even with RBC’s increase, the average five-year mortgage carried by RBC would increase in monthly payment by only $93.

GDP growth has averaged 3.5 percent over three-quarters and inflation is running low at 1.5 per cent, but most experts had expected the increase.

Mortgage lenders are expecting some variable rate mortgage clients to roll into a fixed rate, although it’s worth noting that fixed rates are higher and tend to take into account expected increases. Only people who need the confidence of a firm, fixed monthly payment — normally due to budgets being tight — will likely rush to lock in.

 

Bank of Canada announcement of rate increases July 2017.

 

 

What does this mean to your mortgage?

Canadians tend to carry a large debt load. In Toronto, where prices are on the high side, we average a mortgage to income ratio of 59.52% — high for Canada, low compared to some world cities. [See our previous story on Affordability in Toronto with comparison to other cities>>]

Yet, realistically, this increase, and even potentially a few more, could be absorbed by most homeowners (or prospective owners) unless they are dangerously stretched.  For the average mortgage in Toronto, the increase should average $100 monthly.

What about high-value mortgages?

Our Condo.ca team ran some mortgage numbers to see what the impact would be for someone already leveraged to 60% of their income. We took the average home price in Toronto as our base — $793,915. [See our story reporting on June market numbers..]

Scenario 1 — High-value mortgage around $700,000

Since high-value homes would require higher mortgage balances, we based this scenario on a balance of $700,000

Pre-increase Rates for a five-year fixed vary between 2.4 (CanWise Financial) and 2.89% (Bank of Montreal). We’ll take 2.59% (First National).

  • Monthly payment currently if 6.9% downpayment: $13,668
  • Monthly payment currently if 10% downpayment: $13,099
  • Monthly payment currently if 15% downpayment: $12,335
  • Monthly payment currently if 20% downpayment: $11,293

Now, what happens when we add that extra .25 percent (2.84% on our hypothetical)

  • Monthly payment currently if 6.9% downpayment: $13,752
  • Monthly payment currently if 10% downpayment: $13,179
  • Monthly payment currently if 15% downpayment: $12,411
  • Monthly payment currently if 20% downpayment: $11,363

Scenario 2 — Yet another increase of 0.25 in future?

Interest rates aren’t necessarily projected to dramatically increase, but typically they might not stop at .25%. In Scenario 3, we assume a further increase of .25% on the same high-value mortgage.

  • Monthly payment currently if 6.9% downpayment: $13,837
  • Monthly payment currently if 10% downpayment: $13,260
  • Monthly payment currently if 15% downpayment: $12,487
  • Monthly payment currently if 20% downpayment: $11,432

Scenario 3 — Startup condo buyer

In Scenario 3 we take a lower priced condo, based on the average 59% mortgage to income ratio for Toronto, to see what the “average” person earning $3516.16 per month net could afford to carry. In round numbers, this person could budget up to $2074 (fairly close to the average rent in Toronto).

Based on the above calculators, what value of mortgage (not home) could this person buy? Mortgage calculators at a five-year rate of 3.09 (for safety) bring in a value of $120,000, netting a $2091 monthly payment.

Assuming a two-income family, both average income, double that to $240,000, with a $4250 payment.

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