The importance of a rate hold as BOC hikes rates again

On Oct. 26, the Bank of Canada increased its prime rate by 50 basis points to 3.75 per cent. This marks the sixth rate hike this year since March 2022 for a total increase of 3.5 per cent – and it doesn’t look like increases are stopping just yet. Many homebuyers are wondering if now is the right time to buy, while homeowners are concerned about variable mortgages rising.

Yes, rates are inching higher, but there is some good news. Between August and September, home prices in Canada fell 3.1 per cent – posting the largest monthly decline since 1999. Further, it’s expected that prices will end up dropping close to 20 per cent (or more) by early 2023. So, even though rates are increasing, home prices across the country are dropping in buyers’ favour, especially for first-time buyers who have the advantage of benefits such as land transfer tax rebates.

As prices cool and rates rise, it’s an ideal time for buyers to consider a mortgage pre-approval and get a rate hold before the next hike to get a firm idea of their affordability. The market is shifting to a buyers’ market, so having the pre-approval in their back pocket could be a good way to be prepared for potential opportunities.

To show some quick math, if the average home price in Canada at its peak earlier this year was $700,000, and someone had a down payment of $50,000, with a five-year fixed rate mortgage of 2.49 per cent, their monthly payment would be about $3,030 a month. Their remaining mortgage owed after that five years would be about $572,000. Now, if home prices drop even 15 per cent and that same home is now $595,000, with a down payment of $50,000 and five-year fixed mortgage rate of 5.2 per cent, the monthly payment would be about $3,380. The annual carrying cost has increased by $4,200, which is $21,000 after five years. While that number sounds large, with the lower home price, the remaining mortgage after five years is about $504,000. That is $68,000 less owed moving forward. So, in a basic example, with lower prices, a homebuyer can save nearly $50,000. This is a major savings for a shrewd buyer who realizes the opportunity and has the extra capital to carry the mortgage.

What is a rate hold?

A mortgage rate hold is a great tool that buyers can use against rising interest rates. When you apply for a mortgage pre-approval, the lender will offer you an interest rate that you can lock in for up to 120 days. Should interest rates rise within that four-month period, your locked in rate won’t be affected. In this environment, with anticipatory rate hikes, this could be a good option if you’re looking to buy, renew or refinance your existing mortgage.

When you add inflation and rising cost of living into the mix, it’s even more important to understand how your interest rate impacts your finances. Your rate determines your monthly mortgage payments, and in turn, whether you can afford your home over the long term. It’s key to remember that you are not locked into anything with a pre-approval.

Is now the best time to hold a mortgage rate?

If you’re looking to close on a home, you’ll eventually have to lock in a rate so you can secure a mortgage. If you’re comfortable with the rate you’ve been offered by your broker or lender – the best piece of advice is to take it. Waiting even a few weeks has the potential to add hundreds of dollars to your mortgage on an annual basis – and with rates expected to continue rising, this is a no-brainer.

This is just another reminder that the big banks don’t have to be your first stop when it comes to getting a mortgage. Although it may seem like the best and most convenient route to take, most banks are quite limited in their offerings. Notably, they often leave out key information that can have a big impact on your financial goals and future, such as large prepayment penalty fees.

While the current environment is uncertain, rising rate environments are nothing new. There are many ways to navigate the current market and get approved for a mortgage while reaching your goal of homeownership. The key is to shop around, consult with professionals and make an informed decision that prioritizes your affordability.