Last week the Bank of Canada announced a rate increase of 25 basis points. 25 basis points simply means ¼%. This increase brings the BoC rate to 0.5%
The move was designed to make it harder to borrow money, and so put a bit of a damper on inflation, including rising housing prices.
While ¼% isn’t much, it does affect one’s pocketbook a little. It increases the mortgage payment for variable-rate mortgages by about $12 per $100,000, or $60 on a $500,000 mortgage. (Fixed-rate mortgages aren’t directly affected, as they are based on bond rates, not BoC rates.)
It does have a psychological effect, though. In anticipation of the increase, the market has been incredibly hot—hey, even if the increase is minimal, why not grab the better deal before it’s gone? So, the threat of a rate increase tends to stimulate a flurry of activity in advance. By the time the increase comes, the modifying effect is instant. A realtor told me that’s already being seen in the market.
That said, rates are still near all-time lows. And the increase affects your ability to qualify for a mortgage absolutely nada. That’s because there are already regulations in place that, regardless of the actual rate you’ll get from a lender, you need to qualify as if the rates are 5.25% (the “stress test”). That was mandated to protect consumers from borrowing to their limit when rates were low, then getting into trouble when rates rise.
Actual rates now, even after the increase, are still under 2% for the variable rates directly affected by the increase and around 3% for fixed rates. So, there’s a long way to go before rising rates will affect your ability to qualify for a mortgage.
So how does this affect your prospect of qualifying for a rent-2-own program? Minimally, if at all, and the net effect may actually be positive.
For one, we have to qualify you the same as the banks do, which means we also use the 5.25% qualifying standard. The difference is that we are taking you on as a client who does not currently qualify for a mortgage, on grounds other than that criterion–such things as too low a credit score, inadequate credit information on your report, not yet having enough savings for a down payment, or too short or insecure a work history. We qualify you based on your potential to fix those issues over the term of the rent 2 own.
But, at the end of the day, you’ll still need to reach bank standards. We buy you time to get there, but we can’t get you a bigger mortgage.
So, the only risk we take on with these rising rates is if they go so high as to exceed the 5.25% mark before the R2O term is complete. As you can see, that would require another 2 – 3%, or more, rise in rates. That’s not likely to happen. Economic pundits had forecasted a rise of perhaps four such quarter-point increases over the course of this year, speculating that that would be about the amount needed to wrestle down inflation without ruining our economy. Another 1.5 – 2 points in the following couple of years? Not likely.
The other risk we take on is if the feds, in their wisdom, raise that 5.25% stress test. That’s not likely to happen either because, should rates approach that, they will likely be high enough that no further cushion is needed between actual and qualifying rates.
In fact, the small rise in rates, and potential future increases should help consumers get into rent 2 own if those increases dampen the market. One of the biggest challenges we face right now is that there is so little housing inventory and such great demand, that it is very difficult to find and purchase properties for our clients. Reduced demand will lead to less competition and greater success for us and our clients in finding suitable homes.
Where is this all going? Of course, no one knows. But there are a couple of factors that we should count on, I think. For one, housing prices are not likely to come down. We are not in a “housing bubble” as some people (but none of the experts) are suggesting. These rising rates will help house prices to modify, but we shouldn’t expect them to come back down.
Second, the current world uncertainties (aka, the war in Ukraine) will make it more difficult to wrestle down inflation, a contributing factor the pundits could not have foreseen. We’ve already seen massive increases in oil prices, which will affect every single product we buy (except those, I suppose, that are personally carried to the store—do you know any?) Four increases of 25 basis points may not be enough. I wouldn’t be surprised if the next increase is 50 basis points.
The current circumstances should not deter anyone from considering rent 2 own. If anything, it should do the opposite.
At least, that’s how I see it . . .