By Alisa Aragon
While COVID-19 has had a huge impact on the Canadian economy in the first half of this year, after businesses started reopening, the housing market began picking up. Many home buyers resumed their home searches, and homeowners looking at upsizing to a larger home started listing their homes for sale. With interest rates at historical lows, this is a good time for buyers to get into the market.
The Bank of Canada reviews its benchmark rate about eight times a year, depending on the state of the economy. However, the Bank of Canada made two unscheduled announcements reducing the overnight rate from 1.75 per cent at the beginning of March to 0.75 per cent, with another cut to 0.25 per cent. This was done to cushion the effects of the COVID-19 crisis on the economy in an effort to support the credit and financial system. This is the sharpest decline in the economy since the global economic crisis of 2008/2009 when the overnight rate was last at 0.25 per cent.
The new governor of the Bank of Canada, Tiff Macklem was “unusually clear” that interest rates will remain low for a long time. There are no plans to raise rates until capacity is absorbed, and inflation fits its two per cent target on a sustainable basis, which they estimate will take at least two years.
In addition, the qualifying interest rate was reduced from 4.94 per cent to 4.79 per cent which, to borrowers, means an increase in their borrowing power. To put this into perspective, in 2008, fixed rates were 5.99 per cent. This is much higher than the current qualifying rate of 4.79 per cent.
When you are purchasing a home with less than 20 per cent down payment, the mortgage will be an insured mortgage (also known as a high-ratio mortgage). The mortgage must be backed by Canada Mortgage Housing Corporation (CMHC), Genworth or Canada Guaranty. This insurance premium (also know as mortgage default insurance) is a one-time amount added to your final mortgage balance. This insurance protects the mortgage lender in case there is a loss in principal balance due to a mortgage foreclosure. Both the lender and the insurer need to approve the application. The maximum home price allowed is $999,999 and the maximum amortization is 25 years.
All insured mortgages need to qualify at the qualifying rate of 4.79 per cent. Once you find the right home, a Mortgage Expert will help you find the best mortgage with the best rate and terms. The rate that will be presented to you will be the “contract rate” which is what your mortgage payments will be based on.
All uninsured mortgages you must qualify using at the higher of two rates: the contract rate plus 2 per cent or the qualifying rate of 4.79 per cent. The application only needs to be approved by the mortgage lender and these mortgages can have up to a 30-year amortization.
As you start looking for a new home, and you get a mortgage remember that it is not about the maximum amount you qualify for, but what are you comfortable paying on a monthly basis.
As a Mortgage Expert, I can help you find the best mortgage with the best rate and terms based on your individual needs.
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