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First-time home buyers sheltered if mortgage rates rise

It is now widely expected that the Bank of Canada (BoC) will begin to raise its overnight lending rate this week – but first-time buyers using insured mortgages should not be restricted in the maximum amount they can borrow.
That’s because the maximum affordability for such buyers is usually based on the BoC’s benchmark qualifying rate, which is an average of the big banks’ posted five-year fixed rates. It’s currently at 4.64 per cent—much higher than the rate a vast majority of Canadians should expect to pay.
Home buyers opting for variable rate mortgages will see an increase in mortgage payments, however, if the BoC raise rates by 0.25 percentage points, as expected, in the first round of increases.
The monthly payment on a $750,000 home with 10 per cent down at a five-year variable mortgage rate of 1.75 per cent would rise by $83 per month if rates went up 0.25 per cent to 075 per cent. If rates went up a full percentage point, the same payment would jump an additional $341 a month.
The Bank of Canada has been signaling a rate hike for a few weeks, despite continued low inflation, as incoming economic data have been surprisingly strong. Market rates have already risen in expectation and the Royal Bank has boosted interest rates on its two-year, three-year and five-year fixed-term mortgage rates up by 20 basis points each.


 


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