There is some serious chatter about looming increases to mortgage rates…some of that chatter a little more on the side of panic.
I want to add some perspective that I think is being missed in recent media releases.
We have seen 5 year fixed rates as low as 2.44 % (approx) ….and when rates dipped that low it was…awesome (for lack of better words.)
*BUT* everyone felt or thought that rates were just as awesome when they were 2.99% or 3.09%…or 3.69%.
Once rates dipped to those all time lows –it created what felt like a new “norm”. It was a fairly small window…but we all got used to talking about mortgage rates well below 3%.
The argument can be made that house prices have increased and now rates are going UP- causing financial strain.
Not really the case. House prices exploded back in 2006/2007/2008.
I recently ran across a rate sheet that I sent out on January 2011. (clink the PDF link below). You will note the “best” 5 year fixed was 3.69%.
Without getting into historical month to month or year over year increases and decreases: You can see that over 7 years ago rates were sitting close to and even higher than they are today.
AND: in the last 7 years we have seen extreme movement, consumer confidence and increasing sales in the real estate sector.
I ‘think’ that most people believe that should interest rates increase .25%- 1% their payment is significantly going to increase.
This is simply not the case.
- IF you have a fixed rate mortgage you have zero concerns of changes to your payments until your next term is up for renewal.
What if rates are higher at renewal time?
They may be slightly higher *but* you must remember that you have reaped the rewards of historical all time low rates for one, maybe two, even possibly 3 of your last terms (this is amazing news!)
If you are in a fixed rate currently and you have concerns; you may want to consider the strategy of increasing your mortgage payment (just ever so slightly). This will allow you to get used to a higher payment, avoid future payment shock AND prepay your principal mortgage balance faster. Lowering your overall interest costs.
I have run some numbers to really dig into what the most recent increase to the Bank of Canada Prime rate REALLY means for your mortgage payment.
In the last 24 months we have seen the 5 year fixed mortgage rates as low as 2.44% and as high as 3.49% (*quoting rates for purchases with less than 20% down)
Let’s looks at these numbers closely:
Case Study: If we are looking at a purchase price of $474,900 with a minimum 5% downpayment ($23,995) + CMHC fees = total mortgage $474,141.20
October 31/2016: we saw all time lows on the 5 year fixed at 2.44% =$2109.85/month
October 31/2017: slight increases to the 5 year fixed up to 3.09%=$2265.80
October 29/2018: slight increases yet again 5 year fixed up to 3.49% =$2364.74
So the question in the last week -seems to be if the increase in rates will allow affordability. Absolutely.
First of all, the banks anticipated this most recent Bank of Canada increase.
They increased their 5 year fixed before the Bank of Canada meeting. So as of today your best fixed rate is approx 3.49%.
We are not seeing massive increases. The increases (much like the decreases were) have been gradual.
There would be a difference in a new mortgage payment vs this time last year is +$98.94/month. (using the example above)
Although it is important for every household to save as much as they can month to month: the overall cost with this increase is not a deal breaker for most families looking to purchase their first or upgrade to a larger home.
Another important KEY factor to remember is that the STRESS TEST rate that is used to qualify your application is 2% HIGHER than the rate you will actually be paying.
Up until October 2016 most consumers were maxing out their pre-approval and buying homes right up to their maximum 40-44% ‘Debt vs Income ratio’ based on the rate they were being offered.
Although this new stress test guideline has affected the number of buyers that qualify-the stress test has provided a better qualified applicant who is NOT maxing out their borrowing potential.
Food for thought. In all cases, whether it be today, yesterday or 10-15 years ago. The debt that we see really affecting a house hold is the credit cards, lines of credit, car payments, boat payments, camper payments etc. If you are feeling the stress of increasing taxes, prices, mortgage rates etc I strongly urge you to do anything you can, and do a review of your financial landscape and focus as much as you can on reducing the balances on the outside debts.
If you have any mortgage related questions I am always here. It may be a key time to consider EARLY RENEWAL or a REFINANCE.
Contact me direct via email or phone anytime
Mortgage Broker, AMP.