rates
RISING RATES, LIGHTER WALLETS Over the past 36 months, slowly increasing interest rates have impacted the cost of servicing mortgage (and other) debt.
While interest rates remain unambiguously low when placed in a longer-term historical context, it is also true that the cost of borrowing (for everyone) has increased over the past two years. On top of this, home purchasers have been additionally impacted by the Office of the Superintendent of Financial Institution’s (OSFI) mortgage stress test, which was fully implemented at the beginning of 2018. Together, rising interest rates and the stress test have squeezed buyers’ purchasing power. Because it is useful to consider how increasing interest rates in particular have affected monthly payments for borrowers, we do it here—and what we see is that overall, the dollar-impact of rising rates is relatively moderate. For example, using the Bank of Canada’s Q1 2019 conventional
5-year mortgage rate of 5.34%, it costs $605 per month to borrow $100K. While this is unchanged fromQ4 2018, it’s up $12 from $593 in Q1 2018 (but up only $6 per month fromQ1 2014, with many new borrowers from that time now looking to renew their mortgage contracts). Of course, the math is different when we consider that the average home sale price in the Greater Vancouver board area was $956,690 in February 2019. Assuming a loan-to-value ratio of 80%, the impact of rising rates over the past year on monthly servicing costs would be $92. Clearly, rising rates have been hitting the wallets of buyers and owners alike, but this could soon change for the better given the potential trajectory of borrowing costs. Stay tuned.
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