In 2017 the government brought in several changes to the mortgage lending rules designed to help cool the housing markets. The jury is still out on what impact these rule changes will have.
The last of those rule changes was extending the mortgage stress tests to mortgages where the borrower had a down payment of more than 20%. This means that any new mortgage applications made after December 31, 2017, that are issued by federally regulated lenders will be qualified based on the stress test. Essentially the stress test requires lenders to ensure that borrowers can afford to make their mortgage payments if interest rates were to go up. Depending on the amount of your down payment the interest rate for qualifying purposes will fall between 4.99% and 5.34% in most cases. Using the higher interest rates for qualifying purposes reduces a borrowers buying power by around 20%.
The new stress test rules do not apply to provincially regulated Credit Unions and initially this may be an option for some borrowers. However the credit unions do not have the financial resources to take on all the conventional mortgages so I would expect that they will be using this opportunity to try an bring in some new members who will be willing to move additional business to the credit union. And while they can’t make it a condition for approving the mortgage they may only offer their best rates for borrowers willing to take out some additional products like chequeing accounts, visa cards.
With the economy showing signs of improvement the Bank of Canada increased the Bank rate by ¼% in July and again by the same amount in August of 2017. These increase meant that anyone with a variable rate mortgage or a line of credit saw the rates paid on these products increase by ½% over the course of the year.
As is often the case the bond markets moved ahead of the Bank increase which resulted in pricing on fixed term mortgages increasing by about the same ½%. The increase were higher for the shorter terms and less for the longer terms. The one thing to note in this is that the difference between the Bank Rate and the bond rates has shrunk which would tend to indicate that although rates may increase there is nothing to indicate a big jump in rates.
So what happens in 2018?
The Canadian economy is still showing signs of improvement and December job report was very positive. In addition bond rates moved up in December by about ¼% so we may see the Bank of Canada increase rates as early as this month.
It is widely expected that the US Federal Reserve will increase rates three times in 2018 and as is the case in Canada these increases typically are made in ¼% increments. The consensus amongst analysts is that Canada may be forced to increase rates as well but maybe not by as much as in the US. In deciding between a fixed and variable rate mortgage it would a good idea to take into account a ½% increase in the Bank of Canada rate for this year.
Fixed term rates may also see some increases this year but I would expect that if rates go up it will be somewhere in the ½% range as well.
One thing that may help hold back interest rates is that analysts are predicting that sales of real estate may drop this year and it could have some lenders willing to make a little bit less on each mortgage in order to gain some market share.
Picking the right mortgage depends on your personal situation and how your mortgage fits into your overall financial goals. And with all the changes to the mortgage rules it is more and more difficult for borrowers to understand what they should expect when it comes to getting a mortgage. If you have any questions about your mortgage please give me a call at 604-961-2400.