On July 12th, the Bank of Canada raised its key interest rate from 0.5 per cent to 0.75 per cent. The modest quarter of a percentage point hike, which marks the first interest rate increase from the central bank in seven years, was highly anticipated by economists following not-so-subtle hints by Bank of Canada Governor, Stephen Poloz, that a rate change was imminent.
The Bank of Canada’s decision to move the cost of borrowing upward signals a positive outlook for the country’s economy. In an official statement, the central bank said “Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed.”
Traditionally, interest rates are only kept low in times of economic downturn or stagnation, when the low cost of borrowing can help boost demand for goods and services as well as spur on higher levels of consumer spending.
Up until now, rock-bottom interest rates have played a seminal role in fueling Toronto’s hot housing market. So, naturally, the question on the minds of many homeowners (as well as prospective buyers) is how does this increase impact mortgages and the real estate market as a whole.
Impacts of the Interest Rate Increase
The impacts of the interest rate hike vary depending on your mortgage type.
- Fixed-rate mortgages
For homeowners with fixed-rate mortgages, there’s absolutely no immediate impact. Your interest rate is already “locked in” and won’t fluctuate based on changes in the key lending rate for the extent of your mortgage term (usually set at five years).
What if your fixed-rate mortgage term is set for renewal soon? The good news is that even after the recent hike, interest rates today are still considerably lower than what they were five years ago when you last locked in your rate, so odds are, you won’t see a spike in payments.
- Variable-rate mortgages
If you’re among the roughly 30 per cent of Canadian homeowners with a variable-rate mortgage, you will face an increase in how much you pay monthly.
Variable-rate mortgages are dictated by the prime lending rate and when the Bank of Canada’s key lending rate goes up or down, the prime rate follows suit.
So while homeowners with variable-rate mortgages have been able to take advantage of record-low rates since 2010, they will now see an uptick in payments.
How much of an increase?
Industry insiders suggest monthly payments for the majority of variable-rate mortgages will see an increase of several tens of dollars to just over one hundred dollars per-month. However, the change in payments largely depends on your home price, deposit amount and a myriad of other factors.
TheRedPin’s Principal Mortgage Brokerage, Andrea Jolly, drew up the following scenario below (based on the key prime lending rate) to showcase what the effect may be on your wallet. It’s worth noting, we offer competitive rates lower than the example presented in the graphic and the figures are for illustrative purposes only.
In anticipation of the hike, many banks already made adjustments to their fixed-rate mortgages over the past several weeks. So if you were recently shopping for a fixed-rate mortgage just before the interest rate change, you might not see a notable jump from what was offered prior to the 25 basis-point increase.
For those in search of a variable-rate mortgage, your monthly payments will now be marginally higher than what they would’ve been if no interest rate increase came into effect. Since the central bank’s announcement, Canada’s five major banks raised their prime lending rate from 2.75 per cent to 2.95 per cent.
While Bank of Canada’s hike will lead to an incremental rise in mortgage payments for a segment of buyers, historically, rates are still at record lows for both fixed and variable-rate mortgages. Coupled with the recent increase in the supply of homes on the market and month-to-month fluctuations in property prices, in many respects, market conditions have tilted in favour of buyers. That’s a considerable shift from what has occurred over the past half decade in Toronto.
On The Housing Market:
Since 2012, the average price of all home types in the Greater Toronto Area has skyrocketed roughly 72 per cent. Rock-bottom borrowing costs have played a large role in that double-digit climb, along with other market forces such as solid immigration and job growth numbers in Ontario.
So how will the housing market respond to the interest rate change?
- Home Sales
After digging up data from the Multiple Listings Service (MLS), TheRedPin found home sales in the GTA from July 1st to July 20th dropped around 35 per cent from the same time last month.
- Home Prices
On the pricing front, figures are far harder to predict. However, year-over-year single-digit increases can be expected to continue while month-to-month numbers may hover in the negatives.
TheRedPin did discover the total number of GTA homes that sold for at least 10 per cent over their asking price fell 67 per cent from July 1st to July 20th compared to a month earlier. Over asking sales are often an indicator of a seller’s market and pervasive bidding wars.
- A shift to a pro-buyer environment
Up until March of this year, when home prices surged 33.3 per cent, first-time buyers looking to take the leap into homeownership faced significant hurdles – from record-low supply to frenzied bidding wars.
The recent implementation of the Fair Housing Plan together with the interest rate change will likely result in more of a pro-buyer environment in the real estate market, which many industry insiders suggest buyers should capitalize on.
- Silver lining for homeowners
For most people, the decision to buy, live and invest in a home isn’t about short-term gains. While house flippers may be sensitive to month-to-month changes, when it comes to your property, having a timeline factoring in at least the next three to five years (both from a lifestyle and financial perspective) is often recommended. And to that point, price growth is still in the positives in comparison to the previous year. Moreover, as highlighted above, GTA-wide home prices collectively climbed 72 per cent since 2012 alone.
It’s also important to factor in how your individual property is performing rather than looking at the market as a whole. For example, when grouping together all home types across the GTA, the average sold price in June 2017 was recorded at a six per cent annual increase. However, when isolating just condominiums in Toronto, apartments saw a significant 23 per cent jump.
Location and home type are incredibly important when tracking the state of your real estate investment. Note: share your property type and neighbourhood in the comments section below and TheRedPin will provide information on average prices in your local market.
Lastly, it’s worth highlighting that in Vancouver, home prices have experienced positive growth after the region initially saw a correction in August 2016 when the BC government implemented its own 15 per cent foreign buyer tax. While Toronto home buyers are currently on the sidelines, many will re-enter the market after the psychological impacts of the Fair Housing Plan and interest rate change wear off.