It’s getting a whole lot pricier to get a mortgage in Canada – with the economy back on track and household debt on the rise, policy makers have been tightening the interest rate reins at the fastest pace in a decade.
These measures include three recent rate hikes from the Bank of Canada (BoC), bringing the trendsetting national cost of borrowing to 1.25%. This rate is in turn used to set consumer lenders’ Prime and variable mortgage rates. While the BoC stayed at status quo in its most recent announcement, it has strongly alluded more hikes are to come.
Fixed rates are also on the rise, as bond yields (an investment measure used by banks to set the fixed cost of borrowing) have reached their highest point in five years. That’s prompted three out of the six big banks to follow suit with their posted five-year fixed rates; National Bank and RBC have both increased theirs by 0.20 basis points to 5.34%, while TD hiked its rate by a whopping 0.45 basis points, to 5.34%.
All of this is compounded by Guideline B-20, a new stress test for all borrowers of new mortgages, that went into effect on January 1st, who are paying more than 20% down. These new rules, which require borrowers qualify at either the BoC benchmark rate (currently 5.14%) or their contract rate plus 2% – whichever is higher – have slashed the average buyer’s budget by 20%.
Higher rates are especially tough on first-time buyers
While this has put stress on all buyers, first-time mortgage borrowers continue to feel the brunt, as the “Bank of Mom and Dad” is no longer a viable way to get around qualification hurdles.
While borrowers paying less than 20% down have been stress tested since October 2016, those fortunate enough to receive financial gifts or loans that bumped them into the above 20% threshold were able to dodge stress testing. Under these new rules, however, all borrowers must undergo the stress test, regardless of down payment amount – and that’s taken one tool out of the belt for first-timers struggling to break into the market.
According to new data released by Zoocasa, based on a survey of over 1,400 respondents from all provinces, 48% of Canadians feel the rules are harmful for first-time buyers (25% disagreed, while 27% are unsure).
Despite this perception, Canadians feel it’s a necessary measure, with the majority of respondents (52%) in support of Guideline B-20 (24% disagree, while 24% are not sure). An additional 47% feel the stress test is effective in protecting the Canadian economy, with 20% disagreeing, and 30% unsure.
A wider gap between renting and homeownership
Higher interest rates are also a contributing factor behind the number of would-be first-time buyers who continue to rent or live at home. Only 47% of millennial respondents indicate they currently own a home, while 19% rent, and 13% live at home with family (or someone else who supports their housing).
Of those aspiring to buy for their first time but are stuck renting, 33% indicated it’s due to the inability to save a large enough down payment, while another 26% say they wouldn’t be able to afford monthly mortgage costs. An additional 29% of prospective first-time buyers said they chose renting because it’s cheaper than homeownership.
Penelope Graham is the Managing Editor of Zoocasa.com, a leading real estate resource that combines online search tools and a full-service brokerage to empower Canadians to buy or sell their homes faster, easier and more successfully. Home buyers can browse Toronto real estate listings including houses, townhomes and condos for sale in Toronto.