The Canada Mortgage and Housing Corporation (CMHC) recently projected higher mortgage rates, which could add nearly a fifth to the cost of servicing a mortgage. If these forecasted rates become a reality, Canadians would see their buying power slashed.
More specifically, Better Dwelling said that buyers could lose up to 11% of their max mortgage size over the next two years.
CMHC anticipates 0that mortgage rates will hike as interest rates stabilize. Analysts’ projections were 5.6% in 2018, 6.2% in 2019, and 6.5% in 2020. A closer look on the figures could lead one to the conclusion that the cumulative hike will significantly hurt the buying power in the nation.
How? At present, the 5 year-posted rate by the Bank of Canada is only 5.34%. This will likely translate to a huge reduction in buying power in the future. While the expected hikes each year are small, the overall increased rate of 21.72% by 2020 will have a serious impact on buying power.
“Buyers in 2020 will be paying a lot more interest, reducing the size of principal that can be borrowed. If rates hit their forecast, the max mortgage for a household in 2019 would be 8.7% lower than one earning the same today. By 2020, it would be 11.69% lower than a household making the same today. The increase in rates show a big potential loss in buying power,” the online portal explained.
Delving into the data, it was revealed that impact of the raised rates will be felt more heavily in markets with a high debt to income ratios.
Toronto and Vancouver can anticipate reduced liquidity since these markets have very high home prices for the incomes. Cities like Ottawa and Calgary, meanwhile, have very high incomes and relatively cheap housing. These markets are likely to take the rises easier.