Amidst protests on housing affordability, headlines on plummeting sales and tiny, incremental target rate increases, there’s an ever-increasing uncertainty surrounding Canadian mortgage rates.
Speculation suggests that the Bank of Canada will increase the overnight mortgage rate yet again at the end of this month—putting further pressure on banks to raise variable mortgage rates. But the BoC’s schedule announcement isn’t the only reason why buyers should lock-in their mortgage rates now. Even if the BoC keeps the overnight rate steady at 1.00%, here are three other reasons why mortgage rates are expected to rise this October.
No. 1 reason for rising mortgage rates:
More regulatory turbulence with B-21 policy changes
No, it isn’t a rock n’ roll reference with the B-52’s screaming “Tin Roof!” B-21 and B-20 are the proposed legislative changes that will be announced this month by the Office of the Superintendent of Financial Institutions (OSFI).
These tougher policies aren’t a surprise. This independent federal agency, who is tasked to regulate financial institutions (including pension plans and life insurance companies) has been going through the process of proposed amendments and stakeholder consultations since 2014. Their anticipated announcements this month are a culmination of that work. While not confirmed, it’s expected that OSFI will introduce the following new measures:
- A new stress test for all mortgages that are uninsured. This will capture any mortgage where the buyer puts more than a 20% down payment or on refinance mortgage applications. This new stress test is expected to follow similar rules that were introduced last October when OSFI closed a loophole that allowed borrowers obtaining fixed-rate mortgages to qualify based on discount, rather than posted, rates.
- A more dynamic loan-to-value (LTV) measurement that will adjust to local market conditions. LTV ratios are used by lenders to assess borrower risk. A more dynamic LTV measurement will mean that borrowers in high-priced markets may need a larger down payment in order to qualify for a mortgage.
- Tougher rules regarding co-lending agreements that appear to be designed to sidestep regulatory requirements.
The reason why this announcement will prompt a rate increase is that lenders will now know exactly how they must adjust their underwriting, update their acquisition and risk management practices, and nail down income verification for borrowers. These changes will result in additional costs to lenders, costs that will most certainly be passed on to the borrower. For estimated mortgage rates and payments, check out some of the best mortgage calculators for Canadian home buyers.
No. 2 reason for rising mortgage rates:
It’s year-end for some lenders
Every year around this time, Canadians should expect mortgage rate increases. Why? Because for many mortgage lenders their fiscal year-end is fast approaching.
Turns out for a vast majority of mortgage lenders operating in Canada the fiscal year-end is either October 31 or December 31. As a financial institution gets closer to year-end, mortgage departments don’t feel quite as much pressure to plump up their client numbers and, as a result, they start to raise mortgage rates ever so slightly. That means we can anticipate some of the biggest lenders—including RBC, TD, MCAP and First National—to submit requests for fixed mortgage rate increases starting this month. Other lenders will follow suit as the year winds to a close.
No. 3 reason for rising mortgage rates:
Less competition means higher rates
Back in late 2015 and going into 2016, the federal government introduced mortgage rules and lending requirements that effectively helped reduce competition in the mortgage lending business. While the Feds introduced a number of new rules it was the new regulations to mortgage default insurance. Under these new rules, buyers could not get an insured mortgage on refinances, mortgages amortized for periods longer than 25 years or on properties valued at $1 million or more.
This change impacted one of the largest segments of the market: First-time buyers, who are reported to make up anywhere from 35% to 65% of the annual home-buying market (depending on the year). Since mortgage brokers—professionals who don’t work for just one lender, but shop the market for the best loan and rate—disproportionately represent anywhere from 30% to 70% of this affected market, they also felt an immediate and pronounced impact. Don’t think this matters? Consider a study released by the Bank of Canada in 2011. The report, written by Jason Allen, Senior Research Advisor in the Financial Stability Department, found that the average impact a mortgage broker had was to reduce rates by 17.5 basis points. As Allen wrote: “Brokers are a significant factor in driving discounts.”
Remove the brokers and eliminate buyers and you have fewer people competing in the mortgage market. Less competition results in higher rates, as lenders chase profits. Supply and demand 101, at work. Keep in mind, this cycle is about to repeat itself again. If OSFI follows through with the new stress-test for uninsured mortgages, there’s the potential for even more borrowers to be eliminated from the traditional mortgage loan process.
Will rate changes impact current homeowners?
For any homeowner currently in the market, these potential rate changes will also impact you. Elimination of buyers will mean less competition in the real estate marketplace. This may be welcome news in certain Greater Toronto Area neighbourhoods and in B.C.’s Lower Mainland but could prompt other markets to become stagnant.
Another way current homeowners will be impacted is when you go to renew your mortgage, once your term is up. Now you will have to qualify for a mortgage based on posted, rather than discounted, rates and that means qualifying at a rate close to 4.89%.
For most families, this will mean proving to your lender that you can afford to add $150 or more to your current monthly mortgage payment in order to qualify for the loan using the posted rate. But some homeowners may see this sum double and even triple. Homeowners who put very little towards a down payment, those that refinanced to add in consumer debt, and buyers who took on very large mortgages may be surprised to see how much the posted rate adds to their theoretical monthly mortgage payment.
What should you do if want to buy a house soon or it’s almost time to refinance?
If you’re in the market to buy a home or your mortgage term is about to expire then get a locked-in pre-approval rate. A locked-in pre-approval means your quoted rate is locked-in for a specific period of time, somewhere between 30 and 120 days. While lenders that offer pre-approval guarantees usually add a bit of a premium to these locked-in rates, this premium is rarely greater than 15 basis points. Given the changes in the housing market, getting a locked-in rate now just makes sense.