Expect a modest slowdown in housing activity and more demand for cheaper housing with the new qualifying mortgage rate, some experts say.
The Bank of Canada raised its mortgage qualifying rate to 5.34 per cent this week, meaning borrowers now face a higher bar in the federally mandated stress test. The rate was previously 5.14 per cent.
The qualifying rate, different from actual rates offered by lenders, is used as a benchmark to determine borrower eligibility. The rate is up from 4.64 per cent this time last year.
Borrowers with less than a 20 per cent down payment seeking mortgage insurance have to qualify at the Bank of Canada benchmark rate. Effective this past January, borrowers who don’t need mortgage insurance must prove they could handle either the Bank of Canada rate or two percentage points higher than their contractual mortgage rate, whichever rate is greater.
Canada’s big banks — TD, RBC, CIBC, Scotiabank, National and BMO — all recently raised their five-year fixed mortgage rates.
Robert Goodall, president and CEO of Atrium Mortgage Investment Corporation, said rate increases tend to have a psychological impact on buyers.
“When rates rise at this time of year, it can be demoralizing and a hit to consumer confidence,” agreed Phil Soper, President and CEO of Royal LePage.
However, Soper is optimistic that consumer sentiments will recover given the strength of employment and the economy in Canada.
He believes younger homebuyers, who aim for cheaper mortgage options, will feel the impact the most.
“There’s a general tendency for younger buyers and first-time homebuyers to be more conservative when it comes to mortgage financing,” he said. “They have a tendency to look for the most conservative product on the market, which is now getting more expensive.”
For Robert Hogue, a senior economist with RBC, qualifying rate increases could potentially lead to a restraining of demand from homebuyers.
As well, there will likely be more of a concentration of demand towards lower-priced homes due to the toll higher qualifying rates may have on buyers’ budgets, Hogue said.
“It doesn’t mean that people will stop qualifying,” he said. “New borrowers will continue to be able to qualify, but for a lesser amount.”
Source : Vancouver Sun Newspaper – May 11, 2018