Bank of Canada Increases Overnight Rate
Today the Bank of Canada raised the overnight rate by .25%, bringing the rate to .5%. While this is still low compared to rates in Canada in previous years, there is an expectation of a market shift. The last time that rates increased from .25% to .5% was June of 2010. At that time, the rate dropped to .25% in June of 2019 and stayed there for a year. In today’s market, we have been in a holding pattern with a rate of .25% since April of 2020, meaning that we have had almost 2 full years at the lowest interest rate.
It's important to keep in mind that these interest rate changes affect prime interest rates. This means that this change will directly impact variable rate mortgage. Fixed rate mortgages are tied more to the bond and stock markets and have a different set of variables that affect rates.
Affect on the Housing Market
Looking at what this shift will do in today’s Nanaimo real estate market, and the Vancouver Island real estate as a whole, we need to consider mortgage qualification rules. Since 2018 Canada has implemented the stress test. Canadians applying for a mortgage need to qualify at a rate of 2% above their mortgage rate, or 5.25%, whichever is greater. This means that if your mortgage rate is less than 3.25%, your mortgage qualification potential remains unchanged because you need to qualify at the 5.25% rate. While this means that buyer’s mortgage qualifications are likely stay the same, there is an added cost to their monthly debt obligations.
What This Means for Sellers
As a potential seller, this rate increase isn’t currently going to affect what you can list your house for because buyer affordability remains unchanged for now. If you have been thinking about selling, these increases may be added motivation. The Bank of Canada overnight rate is used to combat inflation and we are currently seeing the inflation rate at 5.1%, the highest it’s been since 1991. The Bank of Canada has a target inflation rate of 2%. It is likely that we will continue to see rates increase in order to get back to a 2% inflation rate so while this most recent increase hasn’t affected affordability, future increases may have a more substantial impact.
What This Means for Buyers
As a buyer, it’s important to ensure that you have a pre-approval in place. This can help with a variable mortgage by allowing you to lock in a rate discount from your mortgage broker. This also helps in terms of a fixed rate mortgage by allowing you to lock in your rate instead of being subject to changes in the open market that could increase fixed mortgage rates.