Canada's Interest Rate Just Went Up Again & Here's How It's Going To Impact Mortgages

Canada has just raised the interest rate to the highest it's been in 20 years and that could mean some major setbacks for Canadians with mortgages, and those who are planning to take one out.

The Bank of Canada has set the federal interest rate from 0.5% to 1%, which is the first increase of that size since 2000, in an effort to slow inflation.

While this will affect all aspects of the economy, most notably making the borrowing of money more expensive for banks, corporations and individuals, this will actually make it harder for those who want to buy a property, or refinance their home, too.

And, according to a report by LowestRates.com, the biggest impact this increase will have on the average potential homebuyer is in your mortgage stress test.

If you're unaware, the mortgage stress test is something that your lender does to ensure that you would be able to afford mortgage payments if the interest rate were to take a massive jump up.

To "stress test" your mortgage, they take the base interest rate for your mortgage, which for a lot of Canadian banks is around 3.5 - 4%, and either add 2% or just use the base amount of 5.25% and apply that to your loan and its monthly payments.

The results of that calculation then shows what your monthly mortgage payments would be if your interest got on a rocket and blasted off.

The lender then looks how much you're able to afford that hypothetical "stress tested" payment and uses that to determine how much it will lend you for your mortgage.

So, if across the board, interest rates are going up, that stress test threshold is only going to go up, making less and less financing available to new homebuyers, or homebuyers looking to refinance their home.

Matter of fact, for every 0.25% over the previous minimum of 5.25% for a stress test, homeowners can expect to lose out on around $12,000. A higher interest rate means that lending to buy a home becomes harder, and requires deeper pockets for the buyer.

This isn't the only increase likely, as financial analysts are predicting two more jumps throughout the year to cool down inflation, which was at a 30-year high as of February.

This article's cover image was used for illustrative purposes only.