Five year fixed interest rates have been rising steadily since last summer / fall from a discounted low of approximately 1.69% to current discounted rates of 2.99% The five year rates are set using the five year benchmark bond as a base or source of funds. On another note, The Bank of Canada meets March 2nd to review the overnight rate which the banks use to determine prime and variable rates. Prime is very likely to increase as well.
A few points to remember and consider;
- The stress test rate is used to qualify mortgage applicants, currently 5.25% or contract rate plus 2%.
- The rate is set by the Ministry of Finance using bank posted rates as a guideline.
- As five year rates are rising in our current environment expect the banks to increase their posted rates.
- Once the posted rates are increased the stress test rate will increase. Your buyers will qualify for a smaller mortgage.
- IT IS CERTAIN THE STRESS TEST RATE IS GOING UP.
- Let’s say the stress test rate goes up by ¼ % to 5.5 %. For each 25 basis point increase or ¼ % increase buyers loose approximately 2.3% of their purchasing power.
- It is reasonable to expect the stress test rate will go up by ½ % this year. Who knows but seems reasonable.
- For a typical average price house in Calgary of $475,000, buyers would get a $22,000 smaller mortgage.
- Lots of assumptions about maxed out debt service ratios and such but still buyers will be getting smaller mortgages soon.
- Big scheme of things, nothing we as realtors, mortgage brokers, and buyers can do about this, but it might be crucial for some buyers to act sooner rather than later
- Also this could really impact folks refinancing and needing to get to a certain mortgage amount for equity out of their existing house to get a down payment