The House of Rising Rates

General Robyn McLean 20 Sep

Some great insight from our friends at REW and an excellent video commentary by REW’s Simon Bray

House of the rising rates.

What inflation and rising interest rates mean for your mortgage.
By REW Editor Sep 14, 2022

You could define the last decade by a lot of things. The exact same superhero movie being released every six months, over and over again to the delight of audiences. The invasion of cyclists in tiny shorts into our coffee shops, breweries, and retinas. The digitalization of classic hardware like wristwatches, a product release that predictably prompted your dad to declare he’s “had a smartwatch for thirty years” while raising his Timex. And yes, from a financial perspective – low interest rates. Less sexy, more savings.

Canadians have had it good for a long time when it comes to interest rates. Sure, housing prices may be through the roof, but at the same time, interest rates have been hanging out in the basement like Eric, Fez, Jackie and Kelso. Watching TV and eating popcorn. Maybe prices and rates are…connected?

I’d like to speak to the manager.

You might be wondering who raises interest rates and why. The answer to the first part of that question is the Bank of Canada, which is responsible for setting monetary policies in this beautiful country. Why they would raise rates is a bit more complicated. But a glance at their website gives us a hint.

Hitting the high notes.

Right now, inflation is at historic highs. The Bank of Canada dropped its key rate to 0.25% during the pandemic and held rates there for nearly two years, all in an attempt to keep the economy buzzing during what the bank anticipated to be a hard time. Now, in an attempt to get inflation under control, and back between its target of 1 and 3 percent, the bank is raising rates. And relatively quickly, we should add.

The idea here is that if rates rise and borrowing costs become more expensive, consumers will spend less and cool price hikes (inflation) across the country.


Driving the point home.

Interest rates directly affect mortgage rates, so it’s not a surprise that when rate hikes are anticipated or announced, people tend to immediately think of mortgages.

Higher rates mean that borrowing money is more expensive, whether you’re borrowing for car payments, student loans, or a mortgage. Applying for a new mortgage is going to cost you more when rates rise, or if you’re already in a variable-rate mortgage, more of your monthly payments will be heading towards paying off interest instead of principal.

If you’re in a fixed-rate mortgage when interest rates rise, your payments won’t change at all during the term of your mortgage. It’s only when your term expires that you’ll have to face the music.

To illustrate how interest rates affect your monthly and total payments, take a look at the video below. This is an example of what a 1% rate difference would look like on a $400 000 mortgage.

As you can see, a 1% increase can make a big difference, especially in markets like Vancouver where housing prices have just come off of all-time highs.

Executive decision.

If your mortgage is up or you’re just looking to enter the market, you’ve got a decision to make. Variable or fixed, variable or fixed, variable or fixed. It’s kept more people up at night than The Exorcist, especially during uncertain times like these.

The truth is that both variable and fixed mortgages have their own advantages and disadvantages, and which is right for you depends on your investment style, risk tolerance, and your general outlook on the market. We can’t tell you what to do, but speaking with your Advisor is a great place to start.

Don’t panic.

It’s hard to predict what’s going to happen in the Canadian real estate market, which makes it the perfect time for bulls and bears to make extreme calls. RBC Assistant Chief Economist Robert Hogue says that resales will fall 23 percent this year and 15 percent next year, with the national benchmark home price falling 12 percent from its peak by the second quarter of 2023. This, just a few months after the Financial Post’s reporting on wealthy investors snapping up luxury condos at a rapid pace. Are things picking up, or slowing down?

No one knows where things are headed, but if we can give you one piece of advice, it’s this. Don’t panic. Home prices are falling, but likely not as much as they rose during the pandemic. Interest rates are rising, but it’s in the bank’s best interest to not make life too uncomfortable for Canadians, to prevent a situation where Canadians can’t make their mortgage, credit card, or car payments.

REW President Simon Bray recently spoke about the latest hike, what it means for the market, and why things aren’t as bad as you might think.

What the future holds.

There are a few things you can do if you think rates are going to climb higher.

  1. It’s easier said than done, but it must be noted that if you think rates are going up, paying down loans quickly is in your best interest.
  2. Homeseekers should aim to get preapproved for a mortgage sooner rather than later, so they can lock in a rate for the next few months.
  3. Educate yourself on variable vs. fixed-rate mortgages, and speak to an advisor to understand what a rate hike could do to a variable rate should you lock in today.

The main thing to understand when comparing fixed and variable rates is that switching to a fixed-rate mortgage can bring you stability since your rate is guaranteed not to change for the entire term of the mortgage. That said, it might not save you money in the long run. Variable rates are notably lower than fixed rates, and even with anticipated hikes, it’s hard to say whether variable rates will eventually jump higher than the current fixed rate offering.

Do your homework.

It’s all part of the adventure. Learn as much as you can about mortgages, terms, and rates to make an informed decision for you and your family. Finding a rate that brings down your monthly payments, even by a small amount, can add up to huge savings over the course of your mortgage. Take care of the pennies, and the pounds will take care of themselves.


General Robyn McLean 15 Sep

An excellent explanation of the Stress Test and why it’s important from our friends at Bridgewater Bank.

Look no further than the recent interest rate hikes to understand why the mortgage stress test is so important. It protects the clients and the lenders if interest rates rise, and it’s in everyone’s best interest for the homeowner to afford their mortgage payments.

We know mortgage brokers are between a rock and a hard place—you want to help your clients get the home they want, but you also want to ensure they can truly afford it. So, how do you have that conversation with your clients? Be straightforward.


The simple answer is that a mortgage stress test in Canada assesses whether a person applying for a new mortgage could still afford it if interest rates increase.

The stress test calculation is the higher of your interest rate plus 2% or the benchmark stress test rate of 5.25% (as of June 1, 2022), also referred to as the Bank of Canada’s qualifying rate. The Office of the Superintendent of Financial Institutions (OSFI) Guideline B-20 sets out expectations for residential mortgage underwriting in all federally-regulated financial institutions.


It comes down to this—it’s better to meet the stress test now than suffer the stress of losing their home later. Many Canadians carry debt, and as the cost of living rises, income is not always keeping pace.

All federally-regulated lenders use the B-20 stress test for new mortgages, alternative mortgages and mortgage renewals with a new lender (but are not applicable if they are renewing with their current lender).

B-20 stress test rules were designed to help guide your clients into a home they can afford. Simply put, the stress test ensures an additional 2% buffer to guard against inflation, and in 2022, we have seen this in real-life scenarios.

“Sound mortgage underwriting is critical for maintaining the stability of the financial system. This is especially true now when changing conditions such as potentially rising interest rates could make repaying mortgages more difficult in the future.”

– Peter Routledge, Superintendent, OSFI