Bank of Canada Gone Back To Pausing Rates – What This Means For Mortgage Holders and Homebuyers
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The Bank of Canada (BoC) has paused rates once again. The news was not shocking to most financial markets experts, as bond rates have increased significantly since the last rate hike. Although the BoC had put out a hawkish message on the last rate hike curbing Canadian appetite for spending and more credit…
The Bank of Canada Policy Rate Left Unchanged At 5.00%
Variable and adjustable mortgages are not impacted by this round of rate decisions from the Bank of Canada.
However, this could still be seen as a signal to bond markets and make borrowing more expensive for new buyers.
An example:
A $500,000 variable mortgage secured at nesto’s low rate of 6.00%, your monthly payment would be $3,350.36
| Mortgage Amount | Mortgage Payment | Qualifying Mortgage Payment |
|---|---|---|
| $100,000 | $670.10 | $802.69 |
| $200,000 | $1,340.20 | $1,605.38 |
| $300,000 | $2,010.30 | $2,408.07 |
| $400,000 | $2,680.40 | $3,210.76 |
| $500,000 | $3,350.50 | $4,013.45 |
| $600,000 | $4,020.60 | $4,816.14 |
| $700,000 | $4,690.70 | $5,618.83 |
| $800,000 | $5,360.80 | $6,421.52 |
| $900,000 | $6,030.90 | $7,224.21 |
| $1,000,000 | $6,701.00 | $8,026.90 |
What Our Economist Francis Gosselin Is Saying on Why The Hike Didn’t Happen
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How You Can Prepare Post-Bank of Canada Rate Decision
For individuals in the housing market, there are many options available. Early renewals remain a viable choice to lock in mortgage rates before expected rate hikes, while extending mortgage terms can act as a hedge against inflation, potentially reducing payments.
Prior to purchasing, renting may be wise whilst waiting for inflation to settle. However, timing the market for your purchase may be difficult as the Bank of Canada is expected to move rates down once inflation is under control, thus moving the needle up on home prices. It’s important to note that although the current home trajectory may show some toughs of low prices, it’s unlikely to continue.
Overall, the market is ever-changing and tracking economic indicators is key to optimizing mortgage decisions. The current rate pause could increase the number of entrants into the housing market, thus driving values up further.
Early Renew Your Mortgage
For those who feel uncertain about market fluctuations, we recommend early renewal of your variable-rate mortgage into a fixed rate. This switch can stabilize your payment over the next 3 to 5 years and potentially reduce your monthly bill. Talk to your lender now to know your options for early renewal or refinance to a fixed rate.
Additionally, for first-time homebuyers, we recommend securing your mortgage and then renewing or extending/refinancing into a fixed rate immediately if budgeting is an issue.
Extending Your Mortgage Term
For a home investment over the long term, early renewal might be beneficial. This will increase your mortgage term and prevent renewing during prolonged periods of uncertainty. Choose between fixed and variable rates depending on your preference and risk tolerance.
Consider prepayments on variable-rate mortgages, or opt for an adjustable-rate mortgage or a shorter fixed term to avoid hitting your trigger point amid the existing economic turbulence.
Renting While You Wait To Buy
Compare renting versus owning costs, where annual rent may cover mortgage payments, albeit renting doesn’t build equity. Inflation will increase home prices, so buy if your finances allow. By waiting on the sidelines, you risk missing out and could face an even more restrictive housing market.
Average rents in Canada increased by 11.3% on an annual basis compared to last July, whereas during the same period, average benchmark home prices nationally increased by 6.3%.
Average rents in Quebec increased by 14% on an annual basis compared to last July, whereas during the same period, average benchmark home prices provincially increased by 2.6%.
Average rents in Alberta increased by 16% on an annual basis compared to last July, whereas during the same period, average benchmark home prices provincially increased by 4.1%.
Average rents in Ontario increased by 9% on an annual basis, whereas compared to last July, during the same period, average benchmark home prices provincially increased by 3.2%.
Average rents in British Columbia increased by 10% on an annual basis compared to last July, whereas during the same period, average benchmark home prices provincially increased by 5.4%.
If the rate pause continues, housing prices will continue to increase, making the probability of jumping from renting to buying a more difficult feat for many would-be homebuyers.
September 2022 vs. September 2023 – What Changed:
Today, Canada’s average home price is $757,300, while a year ago, it was $769,100, a decrease of 1.5%. However, the average 5-year variable rate at nesto has doubled from 3% a year ago to 6% today. This change means that the average monthly payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $2,918 to $3,903. The interest component of the mortgage payment has almost doubled in a year, with a total increase of $985 to the monthly payment from a year ago.
TL;DR – Within Canada, the monthly mortgage payment increased by 33.8% from a year ago, while Canada’s aggregate benchmark home price decreased by 1.5% during the same period.
Today, Quebec’s average home price is $469,900, while a year ago, it was $474,800, a decrease of 1.0%. However, the average 5-year variable rate at nesto has doubled from 3% a year ago to 6% today. This change means that the average monthly payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $1,801 to $2,422. The interest component of the mortgage payment has almost doubled in a year, with a total increase of $621 to the monthly payment from a year ago.
TL;DR – Within Quebec, the monthly mortgage payment increased by 34.5% from a year ago, while Québec’s aggregate benchmark home price decreased by 1.0% during the same period.
Today, Ontario’s average home price is $920,000, while a year ago, it was $926,000, a decrease of 0.7%. However, the average 5-year variable rate at nesto has doubled from 3% a year ago to 6% today. This change means that the average monthly payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $3,513 to $4,742. The interest component of the mortgage payment has almost doubled in a year, with a total increase of $1,229 to the monthly payment from a year ago.
TL;DR – Within Ontario, the monthly mortgage payment increased by 35% from a year ago, while Ontario’s aggregate benchmark home price decreased by 0.7% during the same period.
Home Prices Are Only Headed Up
We believe that this rate pause could take housing unaffordability to a whole new level. With two more deliberations this year by the BoC, with the next one due on October 25th, well after the homebuying season. Making the true impact of further rate hikes harder to comprehend for months after a surge in home prices has taken place over the balance of the summer.
Given the high demand and low housing supply, it is inevitable that housing prices will continue to rise in Canada over the long term. Even if the Feds walk back on immigration targets, Canada’s appeal for resettlement remains unchanged. Alongside our abundant natural resources and political stability, our overall need for immigration adds to the overall value that Canada offers.
Housing demand will only increase as supply continues to decrease. Global warming will also cause Canada to become a popular destination for climate and immigration refugees, contributing to further housing demand. This persistent demand will drive up housing costs and make them valuable commodities.
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