The BoC Announces An Overnight Rate Rise

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After an off-topic blog about mental and physical wellness last time around, we are back discussing a very important topic regarding the economy and banking’s effect on our real estate market. There are some more news coming out about the stress-test regulations this year. Sadly, it’s going to be even more difficult for younger people to purchase a home, as Bank of Canada has decided to change things up.

As a reminder, the purpose of a stress test is to see how something functions under ‘stress’. That something happens to be the potential home buyers. In this case, the MST makes sure borrowers can withstand the stress of an interest increase. What does it depend on? The interest rate offered with the loan and the current benchmark rate.

This new rate hike indirectly comes as a result of the new USMCA which many believe could be very positive for other types of trade across North and Central America, but has pushed the Canadian economy to potentially tighten up a little and increasing the mortgage interest rate 1.75 %. As a result, some of the big banking brands across the country decided to follow suit with their own adjustments.

According to CTV News,The Canadian banks each raised their prime lending rates to 3.95 per cent from 3.70 per cent, effective Thursday.

This piece of news has prompted other media to seek out interviews from those who work in the financial industry, with knowledge about fixed-rate and variable-rate mortgages, and their advice on what to do in these trying times.“Historically, you’ve been better off in a variable rate as far as rates go, but rates do fluctuate and if you see rates go up more of your payment will be going toward interest rather than principal,” said Scott Evans, a financial planner.

“We are in a rising interest rate environment and it is always good to have a pulse check, basically, and have a mortgage review with your bank just to review where you are and assess your options,” says Omar Abouzaher, regional vice-president at BMO.

Having either rate doesn’t keep you completely safe, but it often seems like the better option is a variable rate, as it’s less costly in the long run, although a fixed-rate might be a better short-term option.

Financial planner Scott Evans added that nobody should try predicting the future of interest rates because even the experts can get it wrong. “You shouldn’t be making your decision based on the outlook for interest rates that you’re reading in the newspaper, you should be making it on your own situation, your own personality, how it works with your overall financial plan.” He concludes that even though most people’s situations might be similar when it comes to homebuying, every case should be looked at differently.

How did this all begin? Almost two years ago, the first news came out that there would be a change in mortgage regulations that would make it harder to purchase a home, especially if you are new.

Also in 2016, we published another article about certain factors that could affect the real estate market down the line, with points 1 & 2 being the most relevant at this stage.