In recent weeks, we have experienced some major changes in the world of mortgages. Two significant changes have occurred, while one was intended, the other was an unexpected result of the first one. The current qualification marker is set to begin its decrease on April 6, 2020. This comes as a result of the Bank of Canada (BoC) cutting its key lending rate a significant – .50%. The set standard right now is 1.75% and after April 6th it will drop to 1.25%.
Two years ago, a new test was introduced. The stress test is used as a safeguard against rising interest rates. Before this test was introduced, homebuyers struggled to make payments on their mortgage when an increase in interest rates was experienced. In order to qualify for a mortgage, buyers need to have at least a 2% higher than the contract rate or the Bank of Canada’s average 5-year rate, which today is 5.19%.
In earlier weeks, Canada’s Minister of Finance. Bill Morneau, announced the changes that were going to occur on the benchmark rate. Specifically mortgages with less than a 20% down payment.
Although the financial community has experienced some very mixed responses towards this change. The new qualifying rate will generate more affordable options for some homebuyers. However, for others, a difference may not be noticed. Areas that will not be significantly affected, would be hot-market areas, where prices continue to increase consistently.
After the first announcement on Wednesday, March 4, 2020. The BoC decided it was time to cut their key lending rate by 50 basis points. Creating an overall drop from 1.75% to 1.25%. This had a near-instant effect on lines of credit and variable-rate mortgages. Banks then dropped their prime rate from 3.95% to 3.45%.
With this change, borrowing costs for mortgages, auto loans and other lines of credits are also set to decline. For example, an $800,000 mortgage on a 2.95%
The variable rate would shift to 2.45%, and mean about $200 every month in overall savings.
Why is this happening?
The interest rate drop in Canada followed closely on the heels of the US Federal Reserves. Recently, they made the decision to lower the American rate by .50 points in the prediction that the global economy will slow down due to the unforeseen challenge posed by the uncertainty of the coronavirus. The coronavirus will likely have a drastic effect on domestic spending. The real surprise was that the BoC cut its rate by the same percentage. It was expected to drop, but many predicted it would only drop a quarter of what the Federal Reserve dropped.
Prior to coronavirus’s recent alerts, we experienced a global drop in equity markets and oil prices. This created uncertainty in the financial markets. As confidence dropped in these markets, it was not a surprise as the same drop in confidence hit consumers shortly after. The BoC is considering all solutions to avoid jeopardizing domestic growth.
In regard to the stress test, some economists and housing experts are pushing back. They believe that the new stress test will just further fuel the housing market.
What you need to know about the stress test:
1. As of right now, the stress test benchmark for insured mortgages is 5.19%.
2. Stress test updates, if it were to be implemented today, would be approximately 4.89%.
3. The big Canadian banks will no longer be able to determine the base qualifying rate. We consider this to be quite good news. In recent years, banks have been hesitant to cut their-five-year posted rates, which are based on the stress test. This has added difficulty for borrowers trying to qualify for a mortgage.
4. Borrowers will have more purchasing power overall. It might only be a slight increase, but an increase nonetheless.
Here’s what we have yet to determine:
How will the average buyer be affected by this change? This result will depend on several different variables such as the location of the property. The smaller market’s new benchmark could have a positive effect on affordability for some buyers. However, in the bigger markets like Vancouver or Toronto, the effect may not be as noticeable.
How will home prices be affected? More consumers qualifying for a mortgage may increase the overall demand for a home in Canada. This has the ability to put upward pressure on market prices for homes. One notable fact is that there is still a shortage of properties for sale.
The coming benchmark calculation, will be more flexible. With interest rates falling, consumers are beginning to gain in many cases, buying power would also increase.
We will continue to keep you guys informed on all updates and changes experienced in the financial markets. Some predict that the BoC will decrease at least once more this year.
What effect does this have for fixed and variable-rate mortgages?
Fixed rates are based on the bond market, which since January has drastically fallen. This means it is more than likely that fixed rates will continue to lower. With the BoC rate cut and the possibility of more coming drops.
As of right now, these changes may be some good news in a dark period for all homebuyers.