01 May

What you need to know about the Big 6 mortgage rate hike

Posted at 16:32h in In The News by faristeam

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At first glance, the posted rate hikes by the Big Six Banks* don’t seem like they’re a huge deal since no well-qualified borrower would actually pay posted rates.

However, with the new stress test, these posted rates play a far more important role. Here’s what you need to know:

The double whammy

There’s been a long history of the Big Six Banks using posted rates to inflate penalties. Now, in addition to larger penalties to break a mortgage with a Big Six Bank, these posted rates are used to determine the amount Canadians can borrow, as the new “stress test rate” is the greater of the mortgage qualifying rate (MQR), or the contract rate + 2% – whichever is higher. When posted rates go up, so does the qualifying rate, and when the qualifying rate goes up, purchasing power drops across the board.

First-time home buyers

For first-time home buyers just entering the housing market, it is SO important that, before the house hunt even begins, they obtain a proper pre-qualification or pre-approval. In a rising-rate environment, even a simple rate hold through a mortgage broker could end up saving you thousands by the time you buy.

Current mortgage-holders

If you’re currently holding a mortgage, whether it’s up for renewal this year (like almost half of Canadians), or in the next few years, rising rates could affect you in a number of ways. The biggest impact stems from the new mortgage rules introduced at the beginning of the year which makes it harder to switch lenders at renewal. This, therefore, disincentives lenders to offer competitive rates on renewal (as they know if Canadians try to move to a new lender, they’ll have to re-qualify using the stress test). Borrowers could be stuck paying inflated renewal rates with their current lender as it may be harder to make the switch to a lender with more competitive pricing.

The bottom line

If you’re currently house-hunting or thinking of making a purchase this year, get yourself pre-qualified ahead of these rate increases. In many cases, you can secure a lower rate and more favourable qualification standards if you figure out your financing now instead of waiting until you have an offer in place. If you currently have a mortgage and want to know how these increases may impact you when you renew or refinance your mortgage, reach out to your favourite neighborhood mortgage broker to examine your current mortgage, and how these changes may impact you.