Banks Increase Prime Rate to 3.45% - Too fast. Too dangerous.

Bank of Canada announced today it has increased it's short-term rate by a quarter point to 1.25. All big banks will increase their Prime Rate to 3.45% tomorrow. Royal Bank of Canada is the first to implement this change.   CBC News. (2018). Big banks move to match Bank of Canada's rate hike. [online] Available at: http://www.cbc.ca/beta/news/business/bank-of-canada-rate-decision-1.4490918 [Accessed 18 Jan. 2018].

Some highlights over the last week:

• Most major banks have all raised mortgage interest rates. The following lenders are: Bank of Montreal, Royal Bank of Canada, Scotiabank, TD Canada Trust, Desjardins. Most lenders, regardless of big bank status have raised their rates, also. 

What does this mean?
A variable rate product will go up .25%. So, if the rate is 2.3%, it will now be 2.55%. 

Why timing is everything in a volatile market.
There are many changes occurring in the real estate market and they are all happening very fast. At the beginning of the month, a new stress test was implemented, which now has borrowers qualifying at 2% higher than the contract rate. Today, more bad news, interest rates have gone up, again. Many would argue that these changes are happening too rapidly, and they are right. Unfortunately, by the time most come to understand what is going on and how it will impact them, it will be too late for them make any changes to their financial situation.

Here's what I mean.
The new stress test will take about six months to ripple through the real estate market. As more people find it increasingly harder to qualify for financing, sellers will have to start to reduce their prices to move property. This is the outcome OSFI hoped for. Some experts predict a decline of property value by 40% or more.

The cooling of the market is great for purchasers, however, not great for the many people who rely on their home's value.

Who do these people include:

1. Homeowners who have unsecured debt they want to consolidate 
2. Retired individuals looking to liquidate 
3. Anyone depending on their home's value. 

Let's talk about the first group of people. 
Canadians have a large amount of unsecured debt. Student loans, car loans and other personal loans often take up a large allocation of a person's pay cheque. And, for the last ten to fifteen years, homeowners have enjoyed a real estate market of property value increases and endless possibilities. For example, people have been able to refinance and consolidate debt (often minimizing the pain of large interest payments), triple their net worth by purchasing investment properties using their home's equity, put their children through school, buy family cottages and so on. All of this with the help of low rates, increasing property value and easier mortgage qualifying criteria. Today, the curtain of this dream is slowly coming to a close. 

In January, the second stress test which now makes borrowers qualify at 2% higher than the contract rate. In 2016, the first stress-test, which wiped out over 30% of first-time home buyers, mortgage programs for the self-employed and many equity programs. In the last 6 months, rapid interest rate hikes. It may be too fast for Canadians to even grasp what this means for them. 

Appraisals 
In order to refinance debt into a first mortgage, property value must be substantiated with an appraisal. An appraisal can be 30-60 days old. In a declining market, an appraisal is a crucial factor since if the property's value cannot be confirmed, problems with financing will occur. For example, lenders will only offer up to 80% of the home's value in a mortgage (if the borrowers qualify), and so, if the appraisal cannot confirm adequate value, an application to refinance will not be approved.

Why is this important? If borrowers have debt they need to consolidate, now is the time to seriously review one's finances. There is nothing worse than being trapped in monthly, interest-only payments at 19.999% interest, WITHOUT the possibility of debt consolidation. 

So, homeowners who have unsecured debt need to realize the current climate and act accordingly. 

Retired People
Many retired people will want to liquidate their homes soon in an effort to downsize and put money in the bank.  If property value decreases drastically, this diminishes their retirement fund. In this case, retired individuals can look into the CHIP/reverse mortgage program while property values can be substantiated today.

As anyone can see, a homeowner needs their home's value for many reasons, if not just for security. The market is very volatile and many consumers aren't sure where it's headed. And, since the market is obviously no longer one of decreasing interest rate and more lackadaisical mortgage terms, consumers should look and most importantly, plan ahead. 

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Sarah A. Colucci 
Sr. Mortgage Specialist, Lic. M14000929
Mortgage Edge, Broker 10680 
Direct: (647) 773-4849