The election of Donald Trump as US president and strict new mortgage qualification rules will likely boost interest rates next year and put much greater pressure on first-time and low-income buyers, according to a forecast issued December 12 by the British Columbia Real Estate Association (BCREA).
The new “stress test” mortgage qualification rules, in which buyers with less than 20 per cent down payment have to qualify at the posted five-year rate even if they have been given lower repayment rates, means that “the posted rate has become much more binding and will now have a more immediate and impactful effect on mortgage demand than in the past,” said the association.
The BCREA also note, “Additionally, less publicized changes such as eliminating the availability of insurance on mortgages with greater than 25-year amortizations or potential default insurance risk sharing, are putting upward pressure on rates offered by lenders.”
The report added, “In addition to a shake-up of mortgage rules, a shocking Presidential election in the United States could signal a major shift in the path of long-term interest rates.”
The average five-year mortgage rate is expected to rise from 3.7 per cent to 3.95 per cent next year, according to the association.
“We anticipate that as bond yields move higher in the next year and new mortgage regulations squeeze margins, banks will raise their current offered rates on five-year mortgages by roughly 20 basis points to just under 4 per cent on average,” said the report.
The five-year qualifying rate – the rate at which “stress-tested” homebuyers must qualify – is predicted to rise 20 basis points from 4.64 per cent to 4.84 per cent by the end of next year.
The BCREA said that it was hard to tell if Donald Trump’s promised US economic expansion would be “more than just empty rhetoric” but observed that the bond markets are taking the president-elect at his word so far, which means that “the US Treasury will need to dramatically increase borrowing in international bond markets.”
“This means that the Canadian government, which has deficit plans of its own, will be forced to compete much harder for global capital by offering higher interest rates to investors,” added the BCREA.
The full report PDF is online here.