Since 2010, interest rates were kept at a low, and the 2017 increase represents even a bit of a historic moment with the decision of the BoC to raise the interest to 0.75%. Speculations ran high about when it was going to happen, and many did not expect an increase before 2018, even though, many indicators pointed to mid-2017, which turned out to be correct.
Larger banks are with the BoC on this one, and they also adjusted their prime rates to 2.95%, which also will have an impact on variable mortgage rates.
Of course, buyers, potential buyers, and mortgage holders are the first to feel the change. How does the situation reflect on this target group? Will they be able to cope with the climbing rates and survive this ordeal? Of course, they will! It might not be a walk in the park, but for the majority of home owners and buyers, the additional 0.25% will be manageable.
Effect on Variable and Fixed Rates
In the past decade, many financial experts even advised mortgage holders to go with variable rates as statistics had shown that they were a better option since only a handful of buyers decided to choose them over fixed rates, so they came at pretty much lower rates. Now, time has proven once more why so many people opt for fixed rates. Namely, variable mortgage rates are going to be affected on the spot by this interest rate increase, while fixed rate mortgages will not be immediately affected by the change, as borrowers signed up for a fixed rate regardless of any changes in the market.
When Can Mortgage Holders Expect Fixed Rates to Increase?
So far, those who just got a fixed rate mortgage need not worry for the next five or ten years (depending on their term and the date of their mortgage contract), while those whose mortgage is to expire can expect their renewed contracts to be drafted according to the new interest rate increase. This means that they will also have to get used to the additional 0.25% as soon as they have to refinance their mortgage.
Buyers who remember the 2007 above-7 per cent fixed mortgage rate will notice that it is not as expensive as back then, and from their perspective, homes are more than affordable compared to ten years ago. The stricter mortgage policy is supposed to keep unreliable buyers off and the market stable where borrowers are able to repay their debts with no difficulties.
Will Home Buyers Back Out Now?
Well, opinions are divided, and some think that the real estate market will come to a temporary standstill, but there is still another (and maybe more relevant) theory that buyers will now rush to buy homes as a further increase is expected in the upcoming period. Sales might have dramatically fallen in June, especially in Ontario, British Columbia, etc., but from September, many experts and realtors expect the market to go crazy again.
Petramala, from the Toronto-Dominion Bank, expects the rates to increase three more times by 2018. The next interest rate increase is expected to take place already in October.
Many realtors are convinced that the 0.25% rate will not significantly influence buyers to retreat from a sale just because of the little extra on mortgages. Homes are still affordable, and forecasts predict a steady growth.