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Canadian mortgages just got a little less stressful

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Canadian mortgages just got a little less stressful

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The mortgages landscape just got a little friendlier toward homebuyers – particularly first-timers – and could get even more favourable in the coming months. The Bank of Canada recently announced a decrease of the five-year benchmark mortgage rate 15 basis points, from 5.34 to 5.19 per cent, as a result of the big banks dropping their five-year posted rates.

The move is significant because BoC’s five-year benchmark is the rate against which Canadian borrowers are stress-tested when applying for a mortgage. Borrowers with a down payment of less than 20 per cent must qualify for a mortgage at the Bank’s posted rate, now 5.19 per cent. Borrowers with a down payment that’s greater than 20 per cent are stress-tested against the higher of either their mortgage rate plus two per cent, or the BoC’s posted rate.

“The change in the Bank of Canada five-year benchmark rate now means Canadians can qualify for more home today compared to earlier this year and 2018,” says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial mortgage brokerage. “This decrease alleviates some of the pressure on first-time homebuyers, who are the most financially strained Canadians entering the housing market.”

Improving affordability

According to ratehub.ca, a borrower with an annual household income of $100,000 with a 20-per-cent down payment and a five-year fixed mortgage of 2.70 per cent amortized over 25 years, would have qualified for a home valued at $589,000 at the previous benchmark rate of 5.34 per cent.

With the new qualifying rate of 5.19 per cent, they can now afford home valued at $597,000 – a difference of $8,000, or 1.4 per cent more home.

More rate cuts on the horizon?

When the Bank of Canada held its influential overnight lending rate at 1.75 per cent on July 10 – where it has been since October 2018 – few economists were surprised. After all, the Bank cites, Canada is still dealing with economic weakness from late 2018 and early 2019.

Hardly time for a rate hike.

“The Bank continues to monitor the Canadian energy sector, as well as the impact of international trade conflicts on the global economic outlook,” says Laird. “On a positive note, the Bank is pleased by indications of strong economic growth including a healthy labour market and stabilizing housing market. The Bank recognizes the positive impact that low long-term mortgage rates have had on housing activity.”

There are other factors besides BoC’s overnight rate that influence mortgage rates, but generally speaking, Canada’s major lenders typically follow the Bank’s lead in raising or lowering rates.

The announcement was welcome news for Canadians considering a variable rate mortgage, as BoC has signaled the current interest rate remains appropriate. In the absence of major economic changes, the Bank seems intent to maintain this policy in the near future.

Expecting a decrease

But should there have been a decrease on July 10? And since there wasn’t, is one on the horizon for the next rate announcement on Sept. 4?

According to a report from financial advice organization Finder, assessing BoC’s July 10 decision, two Canadian economists thought there should have been a rate cut. The majority (62 per cent) of panelists predict the next rate change will be a decrease. Stephen Brown, senior economist at Capital Economics, who is among those who says the Bank should have cut the rate in July, foresees a decrease as early as Oct. 30 – and possibly a second reduction on Dec. 4.

For those looking to secure or renew a mortgage, this is all good news. You now have the peace of mind that rates likely won’t rise until next year, and might even decline in the next few months.

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