Follow The Money!
Your Mortgage explained step-by-step:
To make a long story short, The Bank Of Canada (B.O.C) goes through their checklist of economic stability points & movement of target inflation numbers + Pre determined mandates. From there they set the “Overnight Lending Rate”. This is the amount of interest they charge the banks to borrow money from them. To in turn lend out money to you and I in many different forms. But today the only form we will be discussing is in the form of Mortgage Rates.
This morning the Bank Of Canada raised their overnight lending rate 0.50%, FROM 3.25% TO 3.75%. This increase was lower than was anticipated by the market. The wide range assumption was an increase of 0.75%. However, that did not take place interestingly enough.
Just for the record, since March 2nd of this year we have had one of the fastest rate increases series take place in the history of the county. We have gone from the pandemic low of 0.25% to today’s 3.75%, in just 238 days. So again, this is the cost of the money that moves between the Bank of Canada and your trusted big bank / lending facility.
The overnight lending rate then has the big banks layer of profit added to it. This process then turns the Overnight Lending Rate into a Prime Lending Rate for all intents and purposes. Follow closely, we love name changes around here… The Prime Lending Rate then gets either discounted further in a variable loan situation or lent out as is from there in a fixed loan (eg. 5yr fixed mortgage). So, when looking at a variable rate you will have the bank offering discounts off of that posted prime lending rate. These discounts are typically -0.25% to -0.50% from the big banks. So now for example your 5.95% prime rate gets discounted down 0.50% to a 5.45% contract rate. The contract rate is the final rate that you are taking / getting contracted to in your mortgage terms.
But its not over yet! Now for the final piece of the puzzle, the good old Stress Test. The Stress Test was put into place to try and pre-qualify people before hand for possible future rates increasing. This test is to make sure they can theoretically handle an increase & the test they initially used to qualify people at back when introduced in 2018 was 4.79% or +2%, which ever was higher. As you can imagine, mortgage rates were substantially lower back then. Fast forward to June 2021, the stress test was increased to a flat rate of 5.25% or +2%, which ever was higher. Fast forward again to now and the stress test is simply a +2% flat qualification increase. So, for example if your determined contract rate is 5.45%, as a further qualification method they will base your final qualification on an interest rate of 7.45%. This blended with your debt service ratio & all other things considered is where they will determine your total loan amount availability from.
And there you have it. That is the basic structure of the mortgage that you sign on for and what all of this most recent bank of Canada / interest rate noise is all about.
For any further questions please contact us directly today. Or drop your email address in the address bar on the home page.
Thank you for your attention & we look forward to seeing you next week!