'Uncharted territory': What rising rates mean for homebuyers
Michelle Zadikian, BNN Bloomberg • August 18, 2022
Whether you’re a first-time homebuyer or an existing homeowner, the dynamics of the housing market are quickly changing as borrowing costs soar.
“First-time homebuyers, or people that are looking at breaking into the market, they're having to go through more stringent stress testing today than clients have had to in the past,” said Joe Sammut, a broker at Ontario-based Mortgage Architects, in a phone interview.
The mortgage stress test (or minimum qualifying rate) requires borrowers to prove they can handle their mortgage payment at the greater of 5.25 per cent or their contract rate plus two percentage points. With many variable rates now sitting at just north of four per cent, many buyers are having to qualify for a mortgage at six per cent or higher, rendering the 5.25 per cent threshold essentially not applicable.
Rob McLister, a mortgage strategist with MortgageLogic.news, said based on the lowest nationally-available variable rate for an uninsured borrower – 4.15 per cent at Alterna Bank – a homebuyer would be stress tested at a rate of 6.15 per cent.
His math indicates the qualifying rate would cut the purchasing power for a typical prime mortgage borrower almost eight per cent.
“For a household earning $100,000 a year and putting 20 per cent down on a new home, that cuts their maximum possible purchase price by almost $47,000, assuming a 30-year amortization and no other debts,” he said in an email.
ADJUSTABLE VS VARIABLE
While new homebuyers are busy revising their budgets, existing homeowners with a floating-rate mortgage – or adjustable mortgage – will see their payments rise.
“Where people get kind of confused is the difference between a variable rate and an adjustable rate. An adjustable rate is a floating-rate mortgage that has a payment and interest rate that move with prime rates,” McLister said in a phone interview.
The majority of variable-rate mortgages in Canada have a fixed payment so when interest rates rise, the homeowner will pay more interest and less principal, but their monthly payment overall is stable.
Adjustable-rate mortgage payments fluctuate since they’re tied to prime rates, resulting in uncertainty for those homeowners.
Variable-rate mortgage payments will only increase when interest rates rise so high that the payment doesn’t cover the full interest portion, McLister said.
With mortgage rates rapidly changing, staying informed of your options is crucial at this point in time, Sammut said.
“The main message would be to stay put. Stay put with your variable, if it's a good variable. Stay put with your fixed, if it's a good fix. However, if you want to explore your options and you want certainty, you have to phone your lender to find out what is available and what's being offered to you. Knowledge is power,” Sammut said.
He said he has advised some of his clients to consider locking in for a shorter two- or three-year term until rates stabilize.
While new homebuyers are busy revising their budgets, existing homeowners with a floating-rate mortgage – or adjustable mortgage – will see their payments rise.
“Where people get kind of confused is the difference between a variable rate and an adjustable rate. An adjustable rate is a floating-rate mortgage that has a payment and interest rate that move with prime rates,” McLister said in a phone interview.
The majority of variable-rate mortgages in Canada have a fixed payment so when interest rates rise, the homeowner will pay more interest and less principal, but their monthly payment overall is stable.
Adjustable-rate mortgage payments fluctuate since they’re tied to prime rates, resulting in uncertainty for those homeowners.
Variable-rate mortgage payments will only increase when interest rates rise so high that the payment doesn’t cover the full interest portion, McLister said.
With mortgage rates rapidly changing, staying informed of your options is crucial at this point in time, Sammut said.
“The main message would be to stay put. Stay put with your variable, if it's a good variable. Stay put with your fixed, if it's a good fix. However, if you want to explore your options and you want certainty, you have to phone your lender to find out what is available and what's being offered to you. Knowledge is power,” Sammut said.
He said he has advised some of his clients to consider locking in for a shorter two- or three-year term until rates stabilize.
UNCHARTED TERRITORY
For Nasma Ali, a broker and the founder of One Group, client calls have taken a significant turn in this “uncharted territory” where they’re now extremely cautious.
“It used to be that people would come to us and be like, ‘I want to move.’ And that's it. What are the next steps? You know, let's start looking,” she said in a phone interview.
“Now it's completely different. Now, it's more like, ‘I'm worried about rates, I'm worried about the market, is there a recession’ — all of these factors and this fear and uncertainty now that exists, where in the past few years have never existed.”
Her approach and advice to buyers is to have a cushion built into their budget when buying a home.
“I want people to know, not just what your max number [for a home purchase] is based on your income. I want you to know what your monthly payments are and are you comfortable with that payment?” she said.
“I think they should still have a cushion. People should not be buying something where they are completely stretched thin with the monthly payments. That's a situation people will find themselves in where they need to sell when rates go up.”
It's basically the most basic dog you can get, but they are adorable. They're popular for a reason. Support our very own LAPS
Everything you need to know about the upcoming federal election in Langley. The 2025 federal election campaign will end April 28 with a new set of Parliamentarians tasked with the job of governing Canada. Read More Here
Homebuyers in Metro Vancouver are sitting on the sidelines despite market conditions tipping in their favour, according to the latest data from the Greater Vancouver Realtors (GVR). Residential home sales in March 2025 totalled just 2,091—down 13.4 per cent from March 2024 and 36.8 per cent below the 10-year seasonal average. It marked the slowest March for sales since 2019. Active listings climbing to highest levels seen in a decade At the same time, active listings reached levels not seen in nearly a decade. New listings for detached, attached and apartment properties were up 29 per cent year-over-year to 6,455—a 15.8 per cent increase over the 10-year average. Total active listings on the MLS reached 14,546, up 37.9 per cent compared to March 2024 and 44.9 per cent above the seasonal average. “If we can set aside the political and economic uncertainty tied to the new U.S. administration for a moment, buyers in Metro Vancouver haven’t seen market conditions this favourable in years,” said Andrew Lis, GVR’s director of economics and data analytics. “Prices have eased from recent highs, mortgage rates are among the lowest we’ve seen in years, and there are more active listings on the MLS than we’ve seen in almost a decade.” Read More
