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How rising interest rates affect mortgages in Canada (and your ability to buy a home)

“Always pick your yard based on your Summer lifetstyle.”

~ KARL

August 16, 2018 - Karl Yeh

Wondering how the recent interest rate hikes have impacted your ability to qualify for a mortgage and buy a home? In this episode, we discuss how rising interest rates affect mortgage rates including variable and fixed rates. We also explore how much down payment should you pay with the interest rate increases. 

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Transcription:

Karl Yeh:

Hi everyone, welcome to another Homebuyer's school video, a channel where you get the latest strategies, tactics, and tips from home by experts.

And remember, if this is your first time on this channel, and you want to get the latest strategies from the experts, hit the subscription button below, hit the little notification bell, so you don't miss anything.

So, today I'm joined by Mujtaba Syed, Manager Mobile Mortgage Specialist with TD Canada Trust. And today, the question we're going to answer [00:00:30] is:

How has the recent interest rate hikes actually impacted mortgage rates?

Mujtaba Syed:                  

Yeah, it's a great question, Karl.

So, interest rates, when they go up, they impact your payments. So, the higher the rate is, your payments are affected by that.

So, when prime has gone up, so anyone that was in a variable rate, their payments have gone up. So, they most likely saw that they are now paying more on a monthly basis, also the interest costs have gone up.

So, interest costs, what it is, is the cost of borrowing when you actually go lend from a bank.

So, you end up paying a [00:01:00] principle portion, which is what you borrowed, plus whatever the interest portion is, what the banks have charged you for the money that you've borrowed from them.

So, when prime rates or variable rate goes up, your payments go up and so does the interest cost.

Karl Yeh:                              So, I know we were talking about this before we had the segment. So,

Whenever interest rates go up, that doesn't necessarily mean mortgage rates go up? 

Mujtaba Syed:                  

Well, it just depends on what interest rates are going up.

So, if the bank of Canada raises the overnight rate, which we call, technically, prime rate.

So, [00:01:30] the Bank of Canada raises their overnight rate, and then that impacts the bank's prime rate. But they're not really tied into fixed rates.

So, if primary goes up, yes, variable rates go up, credit cards, if you have a variable credit cards, those goes up, any lines of credits. Anything tied to a variable rate will go up.

Anything that is in a fixed rate will not go up. Fixed rates are based on the bond market. So, like a five year fixed rate's kind of based on a five or a bond yield. Very different, they're kind of co-related.

One is not really tied into the other. [00:02:00] There have been instances where primary rate has gone up, and the banks have raised fixed rate, and that's just technically a coincidence, but they're not technically tied together.

If prime goes up, not necessarily fixed rates will go up.

In the last couple years, last four or five years, when mortgage rates were historically low, prime rate didn't change a lot for a matter of four or five years.

But we did see fixed rates go up, come down, and come down lower, and then went back up a bit. But they're just, like I said, they're not [00:02:30] really tied together.

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Karl Yeh:                             

So, let's say you're in a fixed rate right now, and the Bank of Canada raised their overnight rate, you probably won't be affected?

Mujtaba Syed:                  

That's correct, yeah. So, one of the benefits of going into a fixed rate is that you're not really impacted with any changes with the Bank of Canada, or interest rates, or even where the economy is.

So, you do pay a little bit of a higher rate compared to a variable sometimes depending on that, to get that safety and security. Before that five year fixed term, or a three year fixed term, whatever the fixed term is, you are locked [00:03:00] in.

You don't have to worry about rates rising and impacting your payments or impacting your interests charges.

Once again, another great conversation to have with your lender to see if that's something that would impact you and to see what's best for you, fixed versus variable.

Karl Yeh:                             

So, a lot of news right now, and I think a lot of potential home-buyers are concerned about is,

How has the recently increased rates actually impacted the ability to buy a home?

Mujtaba Syed:                  

Yeah, I think most people [00:03:30] are really just worried more now about where interest rates have gone. Yes, they used to be historically low.

But keep in mind, this is not what I would call abnormal. In the history of rates, we've seen rates go up, we've seen it come down. Six years ago, rates were very similar to what they are today.

We did have a short time period where rates were historically low, and when I mean historically, like never in the history of Canada, but that's not normal. That's also not a good thing.

We don't want rates to be that low because it kind of tells us how our economy is doing.

So, [00:04:00] rates are going up, primary is going up in a way it is beneficial for us. It says that we, as a whole, as our economy is doing a little bit better, but it is going back to what we call normal. So, it's not normal for it to be as low as they used to be.

And yes, it's an inconvenience to pay a little bit of a higher rate, but it's whatever is available at that time in the market.

Karl Yeh:                             

So, just to let you know, if you want to know more about interest rates and buying a home, check out our video above.

So Mo, the [00:04:30] one thing that I kind of wanted to know, and we've already talked about the mortgage stress test, and we're going to do more videos on that.

Again, we have another video on the mortgage stress test above.

How has the increased rates actually impacted the ability to qualify for mortgage?

Mujtaba Syed:                  

Yeah, that's another really good question.

So, a stress test is calculated in two separate scenarios. So, we have a scenario, what we called an insured mortgage, which is something that you get when you put [00:05:00] less than 20% down.

And we go through something called default insurance, which is CMHC, Genworth Canada Guaranty as you might have it.

For them, is this a five year posted rate, whatever the Bank fo Canada is five year posted rate is.

So, a five year posted rate is not technically the rate that you get. Most banks actually give a discount off their posted rate.

But for example, today's five year posted rate is 5.34 percent.

So, it doesn't matter what you go with, if it's an insured mortgage, you will have to qualify at that five year posted rate. 

Now, if you go for a conventional rate, that's what [00:05:30] the rules change a little bit for the stress test.

So if you're putting, technically, 20% down or more, and you're not having an insured product, The stress test is calculated a little bit differently. So, they could take a look at your rate, and they can add a 2% premium on top of that, just as a qualifying rate.

So for example, let's say if a five year fixed today, for example, is 3.6, they could charge you 5.6, which is 2% more. So, it really just depends.

In that point, if you're putting more than 20% down, interest rates going [00:06:00] up also impacts your qualifying rate, which also goes up, and then you qualify for less.

Karl Yeh:                             

So is it, with the increased rates, is it better to put down 20% or more, or is it actually better to put the minimum at 5% down?

Mujtaba Syed:                  

Once again, it just depends on your own financial situation, something that you would want to sit down with your advisor, lender, specialist, et cetera, to talk about, to say, "I do have the option of putting 20% down, is that going to be more beneficial to me based [00:06:30] on getting a lower rate, easier qualifications?"

And they can discuss that with you. 

Now, it's not necessarily just because you qualify for a higher that you should go with an insured product, because there's a cost to having an insured product, and that cost will most likely built into your mortgage, which compounds with the interest rate that you pay. Even though it's a lower interest rate, you might end up paying more in the long term.

So, you do want to have that discussion with your lender, specialist, and see if it's if it makes sense for you put 20% down.

Sometimes it makes, even with the [00:07:00] higher qualifying rate and a slightly higher interest rate, it still makes more sense to put that over the long term.

It comes also, a conventional product, it comes with more perks than I guess someone like the insured product does.

If you're putting 20% or more, sometimes you have the ability of going for a 30 year amortization instead of 25 year, which is the cap on uninsured product.

So, it gives you the ability to lower your payments and then go on that. So once again, a great discussion to have with your [00:07:30] lender.

Karl Yeh:                              Perfect. Do you have anything else to add?

Mujtaba Syed:                   No, I think that should be it.

Karl Yeh:                              Great. The question I have for you is,

Has the recent interest rate hike actually impacted your ability to buy a home?

Let us know in the comments below. Well, thank you very much for joining us, and we'll catch you next time.

 

Your turn:

Let us know if you have additional mortgage or financing related questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from home buying experts.  

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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