Rising Fixed Rates - Why Are They More Concerning Than Variable?
Despite the upset caused by our first interest rate hike since 2018, I'm much more concerned/interested in our rising fixed rates, then what's happening with variable.
Keep in mind when you're reading this - the average advertised variable rate is 1.90%, while the average fixed has jumped all the way up 3.59% (with a few lenders as high as 4.04%).
Highlighted below are a few details in regards to why this jump is so concerning:
Impact on the stress test:
Most people think the stress test is simply 5.25% - including many brokers and bankers - however, the rule is the HIGHER of 5.25%, or the contract rate + 2.00%. Frankly, most brokers and bankers have never had to use this rule because rates have always been 3.25% or less since they have been in the industry.
Think of how many emails and posts you see when the stress test changes for even 0.15%. For anyone getting a 3.59% mortgage today, this means they need to qualify at 5.59% which is a 0.29% change. The stress test has changed, and nobody seems to have noticed.
If you have clients who are still shopping on an expired pre-approval, please make sure they check in with their bank/broker before making an offer as they may no longer qualify for what they think.
Impact on buyers:
Around 75% of Canadians historically choose fixed rate mortgages. While I know the fear of rising rates is on clients minds, most are surprised to hear that rates are now over 3% when back in the summer they were under 2%
Why are fixed rates so high? I thought rates just went up by 0.25% last month?
Fixed rates are determined by what's happening in the Canadian bond market. While the media has had a constant focus on the Bank of Canada's decisions, the bond market has slowly crept upwards the past 6 months.
We should expect another rate hike this month for variable, but this information is necessary to be heard as it is happening. The media doesn’t seem to be talking about this enough.
Source: Jim Steffler, TLC Mortgage Group