What do new mortgage qualification rules for homebuyers and Donald Trump’s unexpected election to the presidency of the United States have in common? They are both factors behind an expected 25-basis point jump in five-year mortgage rates in 2017, according to the British Columbia Real Estate Association.
On October 3, the Canadian government announced a new mortgage rule that made it necessary for all homebuyers looking to obtain a high-ratio mortgage to qualify at the five-year benchmark interest rate. Previously, buyers were only required to qualify at their discounted rate.
The five-year mortgage rate is expected to increase from 3.7% to 3.95% next year, the association said in a December 12 report. The five-year qualifying rate—the rate at which homebuyers must qualify—is expected to increase 20 basis points, reaching 4.84% by the end of next year.
“The change in qualification rules for homebuyers means that the posted five-year rate has become much more binding and will now have a more immediate and impactful effect on mortgage demand than in the past,” BCREA said in its report.
The election of Donald Trump will also have an impact on mortgage rates, the association said, as his presidency could trigger a significant shift in the trajectory of long-term interest rates in general.
The president-elect has promised to increase infrastructure spending and cut taxes, which would lead to an expanding deficit. Under President Obama, ambitious infrastructure spending plans were blocked by GOP lawmakers; this is less likely to be the case with Republican President Trump.
The BCREA report said it is impossible to know what the economic impacts of his strategies will be and what he actually plans to carry out, but “if Trump’s plans are more than just empty rhetoric,” the US Treasury would need to respond to this increased spending by bumping up 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,” the BCREA said.
Already, yields on five- and 10-year government bonds in both the U.S. and Canada have increased almost 50 basis points since the American election.
“The five-year qualifying rate could see a minor uptick in the next one-to-two quarters given the recent increase in Canadian five-year government bond yields, though the fundamental change in the importance of the qualifying rate presents a challenge to forecasting,” the BCREA report said.
@EmmaHampelBIV
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