The third Bank of Canada rate hike this year could shut more first-time buyers out of the region’s housing market and add hundreds of dollars to some homeowners’ mortgage payments.

The central bank raised its key lending rate 0.25% to 1.75% on Wednesday, prompting Canada’s big banks to boost their prime rates by a quarter of a percentage point to 3.95% from 3.70 per cent, effective Thursday. The bank previously raised rates by 0.25 percentage points on Jan. 17 and July 11.

Variable loan rates are expected to rise accordingly, adding to the carrying costs for the 32% of homeowners who have non-fixed mortgages.

Online mortgage site Ratehub.ca calculated that consumers who put 10 per cent down on an $800,000 home with a 25-year amortization would pay an additional $283 per month in interest if, as expected, their mortgage rate climbs to 3.19% from the pre-Jan. 17 rate of 2.44%.

That means those homeowners that started the year with a $3,303 monthly payment, will likely end 2018 at $3,586 a month.

The average cost of a Toronto-area home — including detached, semi-detached, townhouses and condos — was $796,786 in September, according to the Toronto Real Estate Board.

It was the fifth time since the summer of 2017 that the central bank raised its trend-setting rate, amplifying concerns about the slipping affordability of shelter in the Toronto area.

Despite a strong economy, research shows that Canadians are struggling to pay their debt. Accounting firm MNP recently reported that 44% of Canadians are $200 a month or less away from financial insolvency. An August survey of 5,074 employees for the Canadian Payroll Association showed 40% of Canadian workers feel overwhelmed by debt — up from 35% last year. Twelve per cent indicated they expect they will never be free of debt.

For the first time in a generation, Statistics Canada showed Canadian home ownership rates dipped in 2016 to 67.8%, from 71% five years earlier, and there are indications that it is more than a blip, said Tim Hudak, CEO of the Ontario Real Estate Association.

“At a time of continued economic expansion, a good economy and long and low mortgage rates, home ownership is actually in decline,” he said.

Millennials, new Canadians and self-employed workers are struggling to qualify for a home loan due to a number of factors, notably a mortgage stress test that requires them to qualify for financing at 2% higher than the Bank of Canada’s five-year benchmark rate or the rate they negotiate with the bank, he said.

Those rules made sense when the housing market was booming and mortgage rates were historically low, Hudak said. “But now we are clearly in an era of rising mortgage rates and a more balanced market and, clearly, the national government needs to re-examine the merits of the stress tests or at least adjusting it for the new reality.”

The stress test is believed to reduce consumers’ home-buying power by 20%. But the Bank of Canada has credited new mortgage rules as a factor in reducing the number of highly indebted Canadian households.

That stress test is, however, one reason there is no need to fear Canadians are in danger of not being able to afford their homes due to higher borrowing costs, said Ratehub.ca co-founder James Laird, who is president of mortgage brokerage CanWise Financial.

“The stress test ensures consumers can absorb at least a 2% rise in rates by the time they renew (their mortgage). So I feel good about our regulatory environment and its ability to ensure that only Canadians who are financially able are purchasing homes,” he said.

Laird said he is less concerned about consumers defaulting on their mortgages — something that is rare in Canada — than about climbing interest rates shutting more first-time buyers out of the market.

“With rates already significantly up this year, with the stress test that’s 10 months old and home prices that are still quite high, I find the challenge is there’s a lot of Canadians with stable employment, savings ….. that don’t qualify,” he said.

Homeowners with variable loans should probably look at locking in their mortgage, Laird said. Even though, historically, non-fixed mortgages have been shown to cost less over the long-term, they are riskier, he added.

It’s not a blanket recommendation though. A fixed rate isn’t necessarily right for consumers who are close to paying off their loan.

The average fixed rate on Wednesday was 3.50% versus 2.75% as the average variable.

“We need three or four more rate hikes for the variable rate you can get today to exceed the fixed rate you can get today,” he said.

Rate Hike Adds to Homebuyers’ Challenges, Could Shut Out More First-Time Buyers by Tess Kalinowski | MSN Real Estate