Oh, those annoying interest rates and their sudden desire to sneak ever upwards. We were all warned this would happen by the experts, but maybe we were thinking we’d be fine if we just kept our heads in the sand. Unfortunately, as expected, the Bank of Canada increased rates again in mid-October, the startling fifth increase in just over a year. They’re kindly promising to pass on three more increases by the end of 2019. So, what does this mean to you if you’re a homeowner, or even are considering buying a home in the next little while? We’ve got the downlow from some of our trusted mortgage experts.
The Rotten Promise
This recent interest rate hike was a quarter of a percentage point to 1.75 per cent. According to our experts it seems the Bank of Canada plans to continue to increase interest rates three more times which means a 2% jump from 2017 to 2019.
We find it ironic that the Bank says the reason for these increases is to reduce consumer debt, but if that’s the case wouldn’t it make more sense to apply the increase only to new loans and leave everyone who’s already carrying debt to bear their burden as is? And of course, that’s never the case. So, what does this mean for you if you own a home?
If you already own your home and have a fixed mortgage rate you can breathe easy for a while. This won’t affect your mortgage payments. However, if you have a variable rate mortgage, depending on the terms, this can see your mortgage payments continue to rise. What you can do is speak to your bank ASAP and see if it’s possible to lock into a rate before the future increases make it difficult to afford your payments. There’re many factors that can affect your terms, so make sure you understand all the implications of renegotiating your mortgage.
Crunching the Numbers
Math sucks, but when it comes to buying a home you really need to crunch some numbers. According to the mortgage experts, if there’s a 1% jump in the interest rate this means a 9.6 reduction in qualifying ability. That’s nothing to sneeze at. As well the same jump in interest rates makes a big difference on how quickly you can pay down your mortgage. Look at the numbers:
A $100,000 mortgage at 3.7% means 43% of your payment goes to the principal over 5 years. The principal is how much you owe on the price of your home less your down payment. Compare that to $100,000 at 4.7% and it drops drastically to 33% going to the principal. Adding insult to injury your payments are 12% higher per month. Oof. That means the higher the interest rates the higher your payments and the longer it’ll take to pay off your mortgage.
Buy Sooner than Later
Of course, coming from a real estate team this might seem like a cunning ploy to sell more houses, but it only makes good sense that if you’re planning to buy a home, you do it before further increases occur. The implications are obvious. The higher the interest rate the more expensive your mortgage payments, but the other issue is maybe not quite as obvious which is that the higher your payments, the more difficult it becomes to qualify for a mortgage. This’ll affect how much house you can afford, the areas you can choose to live in and if you’ll even get a mortgage to buy the house. We say, apply for pre-approval now, todayish, and rest a little easier that you’ve got yourself the best terms possible. Going fixed in this market makes sense and according to our experts fixed rates have not moved with the increase and they’re unlikely to.
Owning is Still Cheaper
Another reason we say if you’re considering buying do it now, is that it’s still cheaper to buy than rent in Toronto. So, applying today for pre-approval will allow you to spend a few months shopping and provide you with a clear picture of what your payments would look like should you find a home. It’ll also help us provide you with a plan regarding an area you can afford so you can decide if it’s what you want.
In a nutshell, as interest rates rise, so too will your mortgage payments, while your chances of qualifying for a mortgage can actually decrease. It’s in your best interest (excuse the pun) to speak to either a bank, a real estate specialist or both to see what you can realistically afford home wise and decide if you should be getting a move on today.