Interest rate hike – Here are 3 main things you should know.
I recorded this video to help make sense to people regarding the recent interest rate hike by the Bank of Canada.
Whether you are a buyer, seller or even if you are not in the market at all – it is my belief that knowing how these changes affect the economy and the real estate market is essential.
The recent interest rate hike has been a topic of conversation for the past few months leading up to it. The Bank of Canada hiked the interest rate by 25 basis points, which is frankly not enough to make a difference in the market.
Here is why:
- Interest hikes contribute to a sense of uncertainty in the market – but not necessarily affect price trajectory. Looking at the most recent interest rate hike series in 2017-2018 the main contributing factors seemed to be the newly introduced stress-test and the foreign buyer tax – not the interest rate hikes themselves. Here is a great article, courtesy of Zoocasa, talking about what happened last time the interest rates rose in 2017 and 2018.
- Stress test was designed to protect the Canadian borrowers. Currently Canadians are qualified based on a 5.25% interest rate, before being approved for mortgage, which is much higher than the current interest rate even if we take the recent interest rate hike into account. In other words, it will take a number of interest rate hikes before Canadians will start feeling the difference.
- Most current homeowners will remain unaffected by the change. About 75% of all Canadian mortgages are fixed, which means that borrowers with this type of mortgage will only feel the difference when it is time to renew the mortgage. On the other hand, those with variable rate mortgages will notice the difference either through paying a bit more per month, or by paying less towards the principal amount of the loan.