The Bank of Canada is maintaining its aggressive posture when it comes to hiking its key rate.
The central bank revealed Wednesday September 7 it was hiking its rate 75 basis points to 3.25 per cent – its highest policy rate since 2008.
This comes after an unexpected rate-hike of 100 basis points back in July, all in a bid to tamp down record-setting inflation.
However, under the federal mortgage stress, all home buyers taking out a new mortgage at a federally-regulated lender must qualify at a rate of 5.25 per cent, or a rate 2 per cent higher that what their lender is offering, whichever is higher.
“The implications of today's Bank of Canada action are considerable for the housing market. The prime rate will now quickly rise to 5.25 per cent increasing the variable mortgage interest rate another 75 bps, which will likely take the qualifying rate to roughly 7 per cent,” said Sherry Cooper, chief economist with Dominion Lending Centres.
The five-year fixed rate mortgages at major banks, now at around 5.5 per cent, would require a stress test qualifying rate of 7.5 per cent. The stress test is not applicable if a mortgage is being renewed with the existing lender.
“Those that are up for renewal this year may find they are paying more for their mortgages and have limited choices in lenders, despite owing less on their mortgage with improved financial circumstances,” said Victor Tran, a mortgage expert with Rates.ca.
“Higher rates mean higher stress tests that homeowners must clear if they want to go to a lender that offers a lower rate than their current lender. With weaker bargaining power. they may be stuck with whatever rate their current lender offers. The ball is not in their court since the current lender has no reason to give them a better deal.”
“This hike could slow the housing market even further,” Tran added. “Until rates plateau and the market stabilizes, buyers may continue to wait on the sidelines before taking the plunge into home ownership. No one wants to catch a falling knife.”
Inflation grew in Canada at a rate of 7.6 per cent in July compared with 8.1 per cent a month earlier. COVID-19 outbreaks, supply-chain disruptions and Russia’s invasion of Ukraine continue to dampen growth and boost prices, according to the Bank of Canada’s policy decision.
The bank added its overnight rate will need to rise even further given the current outlook for inflation.
“The only question is how big will the next move be?” Benjamin Reitzes, BMO’s managing director of Canadian rates, said in a note.
Consecutive rate hikes since March have begun having a notable impact on the housing market as mortgage rates have gone up in step with hikes to the overnight rate.
Metro Vancouver homes sales were down 40.7 per cent in August compared with a year earlier, according to data released last week by the Real Estate Board of Greater Vancouver. Prices, meanwhile, were up 7.4 per cent during that same period.
Reitzes is forecasting a rate-hike of 50 basis points when the Bank of Canada makes its next rate decision October 26.
But RBC senior economists Josh Nye expects a smaller rate-hike is in store, predicting a hike of 25 basis points next month. He said in a note RBC expects a “mild” recession in 2023.
