Bank caution may be overstated
The Bank of Canada threw a caution flag over Canadian housing markets Thursday, warning of increased risks from rising household debt as record low interest rates have drawn many thousands of new buyers into homeownership.
The Bank`s concern is buyers may be lulled into thinking the rates will last longer than they actually will.
"When borrowing funds, especially in the form of mortgages, households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates and the risks surrounding this outlook," it said.
Gary Seigle, Calgary region manager for mortgage brokerage firm Invis, says it is standard practice in Canada to over qualify mortgage applicants.
"The rate we usually use is the three-year rate for qualifying, so basically people are qualified at a higher rate than what they will pay," he says.
The Bank earlier this week confirmed it will hold its overnight rate at 0.25% until at least the middle of next year, which should influence mortgage rates to stay low (on the announcement, major banks in the country lowered some of their rates) but at some point, rates will rise.
Opinions vary as to when and by how much rates will rise, but there is agreement the rate of recovery from the recession and the threat of inflation will be the deciding factors.
Dawn Desjardins, assistant chief economist at RBC Economics, says because markets are still fragile, a significant change to the bank`s interest rate policy is premature, but if the economy continues to build momentum by next summer, the bank will likely increase the rate by one percentage point.
An improving economy changes the playing field, says Seigle.
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