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The Bank of Canada will make an announcement on the key rate on Wednesday and economic forecasters are already expecting another hike. What would be the impact on mortgage payments?
Both holders of variable-rate loans and those preparing to renew their mortgage fear a (very) possible further rise in the key interest rate.
It would add additional financial pressure on the owners, while some are already taken by the throat.
Let’s take an example. Currently, the prime rate is 6.95%. For a $400,000 mortgage, amortized over 25 years, this equates to monthly payments of $2,789.
If the Bank of Canada increases its key rate by 25 basis points on Wednesday and the prime rate increases by the same amount to 7.20%, this means that the monthly payments for these mortgage conditions would increase to $2,851, an monthly increase of about $60.
An increase which is added to the nine others of the last few months.
Let’s take the example of this $400,000 mortgage. If you took out such a loan during the pandemic, when the prime rate was at a floor of 2.45% for a monthly payment of $1,782, your rate expires and you have to renew it today, your new payment would be $2789 — an increase of more than $1000 per month.
Faced with this dizzying rise in rates, Véronique Caron, mortgage broker and team manager at Multi-Prêts Hypothèques, invites borrowers to ask for support.
“We can find solutions to try to relieve them. You can reopen the mortgage and change the amortization period,” she says.
Eventually, rates should also eventually stabilize and “start to come down in 2024,” says the broker. But at what level? “It’s the big unknown,” she admits.
Access to property more difficult
In general, these repeated increases in interest rates erode access to property, underlines Mme Because we.
To qualify their clients for a loan, mortgage brokers must apply “a stress test,” she recalls.
In other words, customers must be able to qualify under the higher of the following two options: based on a rate of 5.25% or the proposed mortgage rate plus 2 percentage points.
“Right now, it’s the second option since we’re well above 5.25%. This greatly limits the room for maneuver of the customers. This causes a significant reduction in the amount they can borrow, ”underlines the mortgage broker.
Mme Caron, however, gives some advice to those who wish to buy a property, despite difficult conditions.
“It is important to choose your lender carefully, not only according to the rates they offer, but also according to the penalties in the event of the reopening of the mortgage. For example, if you choose a fixed rate and the rates go down in the meantime, it could be advantageous to reopen the contract to access the lower rates if the penalties are not too high,” she says.
In addition, the broker suggests considering the acquisition of a plex, for which “the qualification is more flexible”, because of the rental income that can be drawn from it. “It can be a strategy for accessing property,” she says.