The BoC rate hike will bump the mortgage stress test higher: Realtor
Royal Bank of Canada was the first of the big banks to announce it will hike its prime lending rate following the Bank of Canada’s larger-than-expected increase to its benchmark rate.
RBC, TD Bank, Canadian Imperial Bank of Commerce, Bank of Montreal, Scotiabank and National Bank of Canada will raise their prime rates by a full percentage point to 4.70 per cent, from 3.70 per cent, effective Thursday. Prime rates are tied to many types of loans including variable mortgage rates, home equity lines of credit and auto loans.
It’s typical to see the major Canadian banks follow in the footsteps of the central bank and adjust their prime rates in lockstep.
“This means that anyone with a variable-rate mortgage or home equity line of credit (HELOC) will see their rate rise accordingly. This group should calculate what their new payment will be with this rate hike and also budget for further hikes this year,” James Laird, co-chief executive officer of Ratehub.ca, said in a release Wednesday.
“Anyone with a fixed-rate mortgage is unaffected until their next renewal date. If that renewal date is coming up soon, they should start to calculate their payments based on the rates available today.”
Earlier Wednesday, the Bank of Canada surprised Bay Street with a full-point hike, bringing its overnight rate to 2.50 per cent. It’s the largest increase since 1998.
Vancouver-based Realtor Steve Saretsky of Oakwyn Realty said in an interview on Wednesday raising prime rates will ultimately mean less purchasing power for many homebuyers as they’ll have to qualify for their mortgages at a higher stress test threshold.
With the rate hike, Saretsky said variable mortgage rates will now hover around the 4.20 per cent mark. That means homebuyers who opt for a variable rate will be stress tested at a rate of about 6.20 per cent.
The mortgage stress test requires home buyers to prove they can handle their payments at either 5.25 per cent or their contract rate plus 200 basis points – whichever is higher.
“That will reduce that purchasing power and that will ultimately feed through to the housing market,” he said.
“It's been a pretty tenuous housing market for the last couple of months. … So overall, I think this is going to impact the market quite significantly.”