At the beginning of this month, the Bank of Canada raised the key interest rate again. They have hinted that they will enact several increases during the course of this year, in attempt to control the inflation that we have all been experiencing.
So far, no surprise; but understandably this is creating a certain amount of anxiety and uncertainty for homeowners, and buyers who might be contemplating becoming homeowners.
We turned to our economists, and our mortgage professionals, to clarify a few points.
They offer their knowledge, research, and insights here.
1. Why has the Bank of Canada Raised the Key Interest Rate?
Raising the key rate is carried out to curb runaway inflation, through mechanisms which tighten borrowing costs, but also encourage savings.
At the beginning of the pandemic the key rate was reduced three times, to 0.25%, as a stimulus to the economy. Quarter-percent money, reached in March of 2020: This rate had never been so low, and allowed for a recovery of the economy.
*Note: The 2019-2021 period was quite abnormal as pertains to rates.
With the Bank of Canada’s planned hikes this year, rates are essentially returning to a level that facilitates a “normalization” of the market.
2. What Are the Impacts on the Montréal Real Estate Market?
With this new key rate increase, the purchasing power of buyers will be affected downward. Between down payment, and monthly costs, buyers’ purchasing projects will now seem somewhat less attainable.
An example to that effect: Applying the “Stress Test” by adding 2% to the bank’s borrowing rate on a $500,000 mortgage is equivalent to increasing monthly payments by $513 per month. Fewer potential buyers will be able to qualify.
Sellers are starting to notice less traffic on their properties.
Since, as we’ve established, there will be fewer qualified buyers, sellers will notice a decrease in the number of visits and offers on their property.
Sellers who want to sell in order to buy bigger will also find it more difficult to qualify for their new and larger purchase.
In addition to these dynamics: Homeowners who have obtained low interest rates in recent years will most likely postpone their sale or purchase. We might possibly observe some stability in prices, in a new “odd” market in which the demand may be decreased with lower supply as well.
3. Fixed Rate? Variable Rate?
Mortgage professionals are quite unanimous on this question: Variable rate.
However, the choice will depend on the risk and tolerance levels of the buyer.
As of today, we are talking about almost 2% difference between the fixed rate, and the variable rate; so, even if the variable rate increased by 1.25%, or 1.5%, the buyer would still have a lower rate than if he had signed a fixed rate.
Also: It seems that historically, people who have opted for a variable rate have consistently wound up winning in the long run.
4. That Being Said…
BUY NOW, OR WAIT?
If you find a property that meets your needs, and you’re financially ready to buy it, go for it!
If you’re just starting out, start by consulting a mortgage professional.
Your mortgage professional will analyze your situation and help you determine a strategy for one, two, three, or more months, based on your unique set of personal financial factors. They will ensure you well prepared when you find the property of your dreams!
We cannot say this enough: The key to a successful buying project starts with your bank pre-approval, and a clear picture of your financial situation. This entails an overall look at your income, your borrowing capacity, your repayment capacity, and more. An expert is necessary to really know where to go from step one. Depending on your buying objectives, whether a condo, a single-family home, or a multiplex, the process can be complex and sometimes confusing. Thus, the importance of contacting a mortgage professional who will be able to adequately advise you and thoughtfully guide you in the right direction.
Once this financial analysis has been completed: You can review your buying objective with your real estate broker. They will set you on the right path to realizing the full spectrum of your goals.
LIST NOW, OR WAIT?
The Montréal real estate market is still a seller’s market. Take advantage of it.
Start by speaking with your real estate broker to ensure the best sales strategy is developed, and implemented, taking into account your future plans to buy or rent your next property.
The current economic situation need not be a source of anxiety.
Consult a member of our team. You are a buyer, or a seller, not a real estate broker; today’s real estate market is complex to navigate, and both the buying and selling process require the assistance of experienced brokerage professionals.
Avoid the headaches, the unexpected and the unpleasant surprises by engaging our services!