Source: Genworth Canada

When the Bank of Canada raised its key interest rate by 0.25% in January 2018 (its third 0.25% increase in six months), major banks responded by increasing their five-year fixed mortgage rates. For the central bank, the interest rate increases are a sign of optimism: unemployment is the lowest it has been since the 1970s, and Canadian businesses are feeling positive about investment and hiring. But for first-time homebuyers, rising mortgage rates are a cause for some concern. Is it warranted? Read on for three answers to this question: “How will rising mortgage rates affect you?”

How will rising mortgage rates affect you?
Possible effect No. 1: Homeownership may become more challenging to achieve

The most recent interest rate hike comes on the heels of new mortgage rules that apply a financial stress test to those applying for a mortgage, even if they have a down payment of 20% or more.

The main effect of the new mortgage rules is that first-timers will qualify for smaller mortgages. But the silver lining is this: by forcing consumers to meet a more demanding financial standard – proving that they can maintain their mortgage payments, even if interest rates jump – this new rule ensures that affordability is built into every mortgage. Especially since mortgage rates are, in fact, going up.

Advice: Consider putting the house hunt on hold for now and save for a larger down payment. Or buy a less expensive home.

How will rising mortgage rates affect you?
Possible effect No. 2: Homeownership may become easier to achieve

Conversely, higher mortgage rates may actually make homeownership easier for financially fit first-timers who are ready to buy. A perfect storm of rising interest rates, new mortgage rules, and newish foreign buyer taxes in Vancouver and Toronto may have the effect of slowing down these competitive real estate markets. Prices are anticipated to continue to rise, but not at the dizzying pace of previous years.

Advice: If you’re ready to buy, dive into the spring market. Always keep affordability a top-of-mind concern.

How will rising mortgage rates affect you?
Possible effect No. 3: Debt will cost more

Consumer debt is a major concern for many Canadian households, according to a recent national survey by Ipsos, for MNP, one of Canada’s largest personal insolvency practices. One-third of Canadians are currently unable to meet their monthly bills and debt repayment obligations, while one in three fear they may face bankruptcy if interest rates go up too drastically. Interest rates are climbing, as lenders pass Bank of Canada interest rate hikes on to borrowers’ mortgages and other debt; these CBC videos discuss the effect on Canadian consumers.

Advice: As debt servicing becomes more expensive, it’s crucial to get out from under it. Credit card debt is the worst, so attacking that first will provide direction for your larger financial goals.

Save aggressively. Some options include taking on a part-time job, or moving in with family – do whatever it takes to crush your debt, so your financial plans won’t collapse if (more likely when) interest rates increase.

Questions on your mortgage, or want to compare your mortgage to what is currently available? Please email me.