Impact of interest rate hikes and stress test on affordability



What is the impact of the interest rate hikes on affordability? How much did the stress test effect the mortgage amount that a buyer can afford? What is the total impact of these two? What could be the effect of potential further rate increases on affordability?

Bank of Canada increased its interest rate three times in the last nine months (Jul 17, Sep 17, Jan 18). Each hike was by 0.25% raising the policy interest rate to 1.25%. And starting from January 1st 2018, mortgage stress test requirement is extended to buyers with a down-payment of 20% or more. Buyers will be subject to an affordability test using the greater of the Bank of Canada's five-year benchmark rate (recently 5.14%) or the contractual rate plus two percentage points.

If we consider that the average contractual rate was 2.60% before the rate hikes, whereas it is 3.35% recently, and assume that there will be two more rate hikes this year (each by 0.25%), the impact of each step of introduction of rate hikes and stress test on the amount of mortgage loan can be seen below. 

A buyer who could afford a mortgage loan of $400,000 before rate hikes, can only afford $300,000 with the same monthly payment potential, meaning a 25% decrease in affordability. Potential two more rate hikes in 2018 would also have a further impact of -5% on affordability. Please also note that, meanwhile, average condo price in Greater Vancouver increased by 10.7% from June'17 to Jan'18.



Please note that this is an high level analysis based on best available information and assumptions to provide an idea, actual performance may differ. We recommend you to contact your financial advisor to get more precise information.