What will a Bank Of Canada “Overnight Lending Rate” increase mean for home owners? The cost of borrowing certainly goes up, but is it enough to alter the home ownership landscape?
On the eve of the long awaited announcement from the BOC, speculation is that the BOC will finally announce a rate hike and, although it will be fairly insignificant at 0.25%, you can bet that the media will be all over it. In reality, a quarter point increase will cost homeowners about $10/$100,000 more to carry but ONLY if they have variable rates for their mortgages. IF you have a variable rate mortgage and your bank increases it’s rate by say 0.20%, you will be paying about $40 more for a $400,000 loan. To be specific, if you had a $600,000 mortgage at 2.59% (variable), you have been paying 2,714.76 per month. With a rate increase of 0.20%, your rate now goes to 2.79% and your monthly payment increases to 2,775.22. On a $600,000 mortgage, you are now paying $60.46 more per month, or $725.52 per year. basically the cost of a daily cup of coffee from Tim Hortons for a full year. For those on fixed rates, it doesn’t matter at all. Any over night lending rate hike will not affect you.
From the morning of July 12th, you will hear reports on the news and social media of a housing market collapse due to this increase in interest rates, and of course a price correction or the bubble bursting. So let’s think about this for a second. When rates go down, it makes no difference as people don’t go running to buy homes because rates have dropped 0.25 or 0.5%. Similarly, a small rate hike from the BOC will neither be a deciding factor for home buyers, nor will it detrimentally affect affordability. The banks are already qualifying at posted rates, putting people through a “stress test”. All home owners have been qualified at much higher rates (posted rates). This ensures that affordability will not be affected with these rate hikes, and was the driving force behind banks implementing the “stress test” years ago.
Last week, some banks jumped the gun and raised rates. Some went up 0.1% and some 0.15%. They didn’t make any noise about it so nobody cared. Kind of like “if a tree falls in the forest and nobody hears it, does anybody care?” The banks may announce tomorrow that they will not raise rates even though the BOC has announced an increase. That will be great for consumer confidence. Or, the banks may say they will hike rates 0.1 or 0.15%. Either way, they will come out looking good. At the same time, they could take advantage of the rate hike announcement and raise rates by 0.25% as well. Don’t be shocked if they do, and don’t be shocked if they don’t use the full 0.25%. Remember when the BOC reduced rates way back when, the banks never followed suit. There was a bit of a fuss, but nothing major came of it back then. Nothing major will come of an increase now either.
Looking at historical fluctuations in interest rates for the banks, June/July is when they ALWAYS go up and September/October is when they come down. It’s kind of like gas prices around long weekends, just a cash grab during the busy season for closings. Don’t worry too much about the rate hike. It’s insignificant until it becomes a 2 or 3% rate hike, and that won’t happen. With all these little increases and decreases, I guess we could say “if interest rates go up or down by 0.25% and the media doesn’t makes a fuss, would anyone care?” Truth is, probably not! 🙂