Mortgage Rates Increase. Now What Do We Do?
Well, the banks have taken action as they had been threatening for several weeks. This week, TD Bank announced an increase in the prime mortgage rate to 2.85% from 2.7%, which was the first change in 15 months. TD Canada has been the first bank to announce that they will be upping their mortgage rates and the effect of this will largely impact those homeowners with variable rate mortgages. To put it into perspective, borrowers will now be spending an extra $19 approximately in interest each month on a mortgage of $250,000. We have seen 15 months of the lowest borrowing rates that I can recall, and although the media would like to portray this bump in lending rates as dramatically affecting the real estate market, many people would disagree.
Back in the 1980’s when we faced a full economic recession, the banks were charging mortgage rates of 18.4% in 1981! Keep in mind that the amount you will pay in MORTGAGE INTEREST is an important factor to consider when purchasing a property.
Take for example, you purchase a home with a mortgage of $200,000 today and lock in at an interest rate of 4.69% (which is close to the Bank of Canada’s fixed 5 year posted rate), with an amortization period of 20 years. What will the interest charges be? Approximately $107,385 over the course of borrowing for 20 years. Now imagine, purchasing a home with a mortgage of $200,000 in 1981 with a mortgage rate of 18.4%. How much interest would you have ended up paying? $200,000? $300,000? $400,000? Not even close! You would have paid $528,264 in INTEREST ALONE for that mortgage in 1981.
Back in 2010, the Canadian government implemented changes that forced banks to have to qualify borrowers based on the banks’ POSTED 5 year fixed rate to ensure that the owner would be able to afford the payments (which would be higher than those of a variable or preferred rate). This approach by our government was intended to protect home owners from potentially losing their homes (should variable rates increase) and to take the lessons learned from our neighbors to the South with their “enticement rates” that allow someone to purchase a home or property that is way outside their financial ability to ever repay. Last month, the Canadian government took even stronger steps to ensure that home buyer could afford the property they want to purchase and forced banks to qualify borrowers regardless of mortgage type, based on the 5 year Bank of Canada posted rate – currently 4.64%. This measure created a “stress test” to combat the risky effects of low interest rates as well as how lenders view debt loads.
I have always maintained that our clients should never borrow more than they can afford to pay. If an extra $19 – $36 in payments will really affect your family’s lifestyle, then chances are pretty good that you are already in “over your head in debt”. I caution clients to look at the long-term picture and to really consider locking in at a fixed interest rate, so that you do not have to constantly worry about what the prime rate is doing. It is critical to really take stock of your real estate portfolio and create a budget that you and your family can live within.
Rental rates for investors have been quite high in our area as many buyers took a break from the market and chose to rent as well as our city seeing an influx of younger residents to Nanaimo. Real estate is cyclical, meaning that it goes in cycles, yet as a long-term investment, I still think that it is the best “bang” for your buck. Think of it as your own self-directed RRSP or pension fund that you can touch, physically see and have personal control over which will create added retirement income when the time comes.
If your mortgage is coming due for renewal within the next 12 months, or if you are on a variable rate (which means that it is a “floating rate” determined by the prime lending rate and subject to change), give our MMS Homes Team a call and we can refer you to a mortgage specialist who can review your specific situation and borrowing needs at no cost. A mortgage broker can provide you with a free mortgage review and rate options that are lower than most bank rates. Each of our MMS Homes team has used the services of a mortgage broker in the past for their real estate purchases and we can honestly say that we have been impressed with their knowledge and professionalism. We really want to encourage each of you to be proactive about your real estate debt, especially as we all know that the rates are going to rise.
If you would like more information about the current market trends or are interested to learn the value of your home or property, please feel free to contact us, MMS Homes, anytime at 250-751-1223 or email us at firstname.lastname@example.org. PS – Make sure that you remember to “fall back” this Sunday, November 6, 2:00 AM – hopefully you will enjoy that extra hour looking for a new home!
Brian & Myles McCullough and Kiel Lukaniuk