The Bank of Canada's latest interest rate hike means higher borrowing costs for consumers with variable-rate mortgages, loans or lines of credit, but it is also good news for savers and future homeowners.
The decision to increase its benchmark interest rate to 1.5 per cent on Wednesday prompted all of Canada's Big Six banks to raise their prime rates, thereby passing the rate increase along to their customers.
Those with variable-rate mortgages will now face higher interest payments, a concern for many Canadian households that are already saddled with hefty debt loads, said Samantha Brookes, chief executive officer of brokerage Mortgages of Canada.
After the central bank's announcement, Royal Bank of Canada, TD Canada Trust, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank all said they will increase their prime rate by a quarter of a percentage point to 3.70 per cent, effective Thursday.
The increase raises the cost of borrowing for customers with variable-rate loans, but people with money socked away in savings accounts and guaranteed investment certificates will benefit, said Scott Hannah, the president and chief executive of the Credit Counselling Society.
Overall, the impact of the latest rate hike will be modest for consumers, said Meny Grauman, an analyst with Cormark Securities Inc. The rate hike is in reaction to a healthy Canadian economy, which is beneficial, he added.
Rates are slowly on the way up, but remain relatively low historically, Grauman added
The Bank of Canada raised its mortgage qualifying rate to 5.34 per cent this week, meaning borrowers now face a higher bar in the federally mandated stress test. The rate was previously 5.14 per cent.
The qualifying rate, different from actual rates offered by lenders, is used as a benchmark to determine borrower eligibility. The rate is up from 4.64 per cent this time last year.
Borrowers with less than a 20 per cent down payment seeking mortgage insurance have to qualify at the Bank of Canada benchmark rate. Effective this past January, borrowers who don’t need mortgage insurance must prove they could handle either the Bank of Canada rate or two percentage points higher than their contractual mortgage rate, whichever rate is greater.
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Sales activity across the country, the association says, will be reduced by OFSI’s revised mortgage underwriting guidelines.
The Canadian Real Estate Association (CREA) has cut its home sales forecast for next year due to the impact of tighter mortgage regulations that come into effect New Year’s Day, which are expected to rein in spending for some buyers.
CREA said in an updated projection Thursday the banking regulator’s revised mortgage underwriting guidelines, which include a stress test for uninsured mortgages, will reduce sales activity across the country, particularly in and around Toronto and Vancouver.
The association now forecasts a 5.3-per-cent drop in national sales to 486,600 units next year. That new estimate shaves about 8,500 sales from its previous 2018 forecast.
Interest rates are going up, again, as Canada's red-hot economy continues to defy expectations.
After a summer of surprisingly good economic news, the Bank of Canada raised its benchmark interest rate a quarter of a percentage point to 1 per cent Wednesday – its second rate hike in less than two months and a prelude to higher borrowing costs for Canadians.
Major lenders, including Royal Bank of Canada, responded by raising their own prime lending rates by the same amount – moves that could squeeze the most heavily indebted Canadians and discourage others from buying homes.
The earlier-than-expected move caught investors and analysts off-guard, sending the Canadian dollar up to nearly 82 cents (U.S.) and raising expectations of more hikes this year. The dollar is now up about 14 per cent since hitting a low for the year of roughly 73 cents in April.
Bank of Canada Governor Stephen Poloz and his central bank colleagues acknowledged they have been taken aback at the strength of the economy, which surged ahead at an annual pace of 4.5 per cent in the second quarter to lead the Group of Seven countries. As recently as July, the central bank said GDP growth would reach just 2.5 per cent in the second quarter.
Wednesday's rate decision reinforces the message that the era of easy money and low rates is coming to an end in Canada. The central bank's overnight rate generally sets the pattern for mortgages, bonds and deposits.
The Bank of Canada may not be done. Economists are already bracing for further hikes if the economy continues to show strength through the rest of the year.
"Absent a significant shock, [Wednesday's] rate increase will be part of a larger and longer march towards rate normalization," Toronto-Dominion Bank economist Brian DePratto said in a research note.
Bank of Nova Scotia economist Derek Holt applauded the central bank for doing "the right thing" and said the door is "wide open to further rate hikes."
But there are limits on how far and fast the Bank of Canada can get its benchmark rate back to a more normal level.
Toronto home prices have just seen two of the strongest back-to-back months on record, but signs of cooling are
starting to emerge.
The Toronto Real Estate Board said Wednesday that prices in the Greater Toronto Area rose 31.7% in April, following a
record 33.2% rise in March. The price for all home types rose to $920,791, compared to $739,082 for all home types in
But there were some signs that upward momentum could be slowing in the coming months. First, prices from March
were nearly flat. Prices for single-detached homes actually fell from March to April, from $1,214,422 to $1,205,262. Finally, sales took a noticeable 3.2% tumble compared to a year ago.
All of that coincided with a flood of new listings in the market — 21,630 homes were listed for sale in the GTA last
month, up 33.6% from this time last year.
While the new listings come during the peak spring homebuying season, many buyers may also be trying to take advantage of record market prices to sell their homes.
"The fact that we experienced extremely strong growth in new listings in April means that buyers benefitted from considerably more choice in the marketplace," said TREB president Larry Cerqua. "It is too early to tell whether the increase in new listings was simply due to households reacting to the strong double-digit price growth reported over the past year or if some of the increase was also a reaction to the Ontario Government's recently announced Fair Housing Plan."
April housing numbers are being closely followed because the Ontario government released a set of new housing rules on Apr. 20. The rules include a new speculation tax on foreign buyers and new rent controls that limit rent hikes on buildings built after 1991. It's expected that data in the coming months will more clearly reveal how these new rules will affect the market.
TREB did release additional data Wednesday that painted a clearer picture of who the buyers in the current market are. It said that of the people that bought homes in the Greater Golden Horseshoe between 2008 and April 2017, only 2.3% were foreign buyers. The majority — 87-90% — purchased their homes as a place to live.
TREB also looked into those who own multiple properties — a segment of buyers that some have said are fuelling speculation and leading to abnormal price growth. TREB found that those who own more than one property represent 6.2% of the market — a figure TREB says is "relatively small."