Interest rates are up, So what's my home worth now?
The Bank of Canada raised the target overnight rate by 0.50% today, meaning that variable rates are going to rise accordingly and fixed rates will likely rise in time as well. Real estate prices in Canada are heavily dependent on where interest rates are, because the sticker price is so high and most people need financing through mortgages. A rate hike of 0.50% doesn’t seem like a lot, however it does have great impact on mortgage payments.
Take a look at the table below for example.
The average price of a home in Toronto for April 2022 is $1,254,468.
If you assume a 20% down payment, you would be borrowing approximately $1,000,000 (highlighted horizontally below).
Any 0.50% change in the interest rates equates to a 5% change in the mortgaged amount to keep the payments roughly equivalent.
Assuming that purchasers are maxed out on their affordability requirements, they will have to either make up the difference in cash (or equivalent), or they simply just have to borrow less. As you probably know, mortgage affordability is determined by looking at the borrower’s Gross Debt Service (GDS) and Total Debt Service (TDS) ratios, based on the minimum qualifying rate of 5.25% (on a 25-year amortization) or +2% over your contract rate, whichever is greater. Because of this stress test, purchasing power is decreasing for anyone with a mortgage, which is approximately 60% of the Canadian population.
So what does this mean for the real estate market? It’ll be hard to say, but here’s a good tidbit of information to keep in the back of your mind:
The general rule of thumb is that for every 1% increase in interest rates, your mortgage borrowing power decreases by 10%.
The reason why I say “it’s hard to say” is because this doesn’t account for buyer sentiment. Residential real estate values depend on a variety of factors, most notably direct and indirect recent comparable sales, but also the current sales volume as well. If you look at the payment affordability chart below, this may give you a clue as to what buyers can afford (which isn’t the same as what the market says it’s worth).
As always, if you want a detailed consultation, please reach out to me or my team! Book an appointment to chat now.
As interest rates go up, affordability comes down.