For a while now, there have been reports surrounding the hike in interest rates, and this news has finally come to actuality as the Bank of Canada has confirmed that the benchmark interest per quarter point has been raised to 0.5%. As sad as this announcement might be for some people, it is imperative to know that this increment is essential in helping the country tackle inflation that is envisaged as a result of the COVID-19 and also the current war happening in Ukraine.
It is also crucial to know that this increase in interest rate is the first of many in the coming months. As much as this is a necessary step to take by the government, a lot of residents would find themselves on the uncomfortable side of the orb, especially those in the process of applying for a mortgage. After the global pandemic that struck in 2019, the government of Canada devised a means to help residents ease back into how things were before the arrival of COVID-19.
The interest rate was curtailed to a record low, and as such, households could generate quite a lot of savings during that period. Most of which were invested in real estate partly because of the low-interest rate. This circumstance made house prices skyrocket to an all-time high, especially in red-hot areas of Canada. However, these privileges and opportunities will cease to exist due to the increased interest rates and the anticipation of more hikes.
How Does The Hike Affect Getting Qualified For Mortgage?
Understanding how an increase in interest rates affects mortgages requires in-depth knowledge about processes and activities surrounding mortgage application. However, the primary factors that influence it are:
- The Overnight Rate: This is arguably the most critical factor determining mortgage application if you are opting for the variable rate option. Consequently, it also has the most significant effect on how much your mortgage will be affected if the overnight rate gets increased by the Bank of Canada. If there is a hike in the overnight rate, variable rate mortgages will automatically become more expensive, and if the overnight rate is reduced, variable rates become less expensive.
A fixed rate mortgage, on the other hand, doesn’t get affected by the overnight rate instantaneously. The stipulated fee will continue until you are required to renew and that is when you would have to adjust to the terms of payment by the current overnight rate. The overnight rate is essential for all types of mortgages, but it has more effect on variable rates than the fixed rate option.
- Credit Rating: This factor is equally significant when applying for a mortgage. An excellent credit score almost guarantees your chances of securing a reasonable rate when you apply, unlike when you have a not-so-great credit score. Usually, the credit score is graded from 300-to 900. You can boast a good rating if your score exceeds 700. However, If it falls below 700, it will not be regarded as a good rating and may hinder your chances of getting a reasonable rate for your mortgage.
To keep a good credit score, you must ensure that you ultimately pay off your debts at the right time, make more than the minimum payments required on your credit cards, and maintain an account balance below 30%.
With the recent increase in the interest rate by the Bank of Canada, it will become harder to qualify for a mortgage because the conditions will become stifler. These conditions may vary based on if you are a first-time homebuyer or a homeowner. It becomes more difficult for first-time buyers to own more homes because the cost of owning a property will increase significantly due to the rise in interest rates.
Another set of people that will be affected by the recent hike in the interest rate is the current homeowners that have a variable rate mortgage. Regardless of how long they have secured the mortgage, they will have to adjust their monthly payment to the current rate stipulated by the Bank of America immediately.
The real estate market in the country is about to go through some turbulence in the months to come, as the increase in the interest rate that the Bank of Canada approved in the first quarter of 2022 is billed to cause a rapid turn of events. Since 2020, the government has presented a low-interest rate to help the residents recover smoothly from the aftermath of the pandemic. This factor alone gave rise to households investing in real estate, which caused house prices to be at an all-time high.
Another effect of this increment that is bound to happen is the possibility of finding it more challenging to secure a mortgage now than it was in the past years. This effect boils from the reality that the hike in interest rates will intensify the conditions required to secure a reasonable mortgage rate.