Rob Ferguson – Yourhome.ca
Like many homeowners, Sarbjit Kaur has been riding the knife edge of record low mortgage rates for well over a year, waiting for the right time to lock in as cheaply as possible for a longer term.
“I keep watching,” says the young mother and owner of Kaur Communications in Mississauga.
And for good reason. Experts warn rates are creeping up as bond markets react to concerns about high international debt levels and expectations the Bank of Canada will raise rates soon to quell inflation as the economy improves.
“The big question is where will mortgage rates be in five years and what could my payment be then?” says Kevin Moffatt, vice-president and mobile mortgage specialist with TD Canada Trust.
Another issue facing buyers is the new mortgage qualification rules designed by the federal government to cool the housing market and make home shoppers more realistic about what they can afford.
Taking effect Monday, April 19, the rules set tougher criteria for lenders assessing a borrower’s ability to carry loans insured by the Canada Mortgage and Housing Corporation, in cases where the down payment is below 20% of a home’s price.
The new standard is the ability to repay the five-year fixed mortgage rate, now posted at 5.85%, instead of the three-year rate, now at 4.35%, meaning many buyers will need higher incomes, larger down payments or have to opt for cheaper properties. As a rule of thumb, banks say mortgage payments shouldn’t exceed one-third of a family’s gross income.
“There are people who will not be able to buy a house,” says Pauline Aunger, president of the Ontario Real Estate Association. “If you were on the edge before, you’re below now.”
Amid concerns that low rates have encouraged Canadians to take on too much debt, Moffat has lost count of how many customers have been enjoying variable-rate mortgages around the tempting 2% mark.
“That just isn’t realistic long-term,” he says, urging both home owners and new home buyers to do some “what if” calculations to chart out how their mortgage payments could change depending on how high rates go.
“You have to be very careful,” adds Aunger, a real estate agent in Smiths Falls, near Ottawa.
As a single parent of two young girls, Kaur has one eye on her budget and the other on the mortgage scene. Rates for fixed terms of more than three years rose six-tenths of a%age point a couple of weeks ago.
At some point, perhaps this summer, she’s set to trade the advantages of her low variable rate mortgage for the peace of mind that comes with the lowest fixed rate she can get. It will be higher than she’s been paying, but she wants financial predictability.
“I would like to save money as long as I can,” says the former communications director for a Queen’s Park cabinet minister, noting falling interest rates have put an extra $200 in her pocket monthly.
Moffat says the hardest people to convince that historically low interest rates won’t be around forever are home buyers in their 20s or 30s, who’ve lived their adult years in a period of steadily declining and reasonable rates since the late 1990s.
“I tell young people today that my first mortgage, in 1988, was 11.5%. They almost fall over dead,” he quips. “I don’t think we’ll see rates like that, obviously, but the 6 to 8% range is possible one day.”
The difference in payments between a 2% rate and 6% is astounding.
For example, a $400,000 mortgage at 2% costs $391 weekly, rising to $485 weekly at 4% and $591 a week at 6%. Adding it all up, the difference between 2 and 6% is an extra $865 a month out of the household budget.
The message is, don’t buy more house than you can afford. And if it looks like higher rates could create a household financial crunch, try to pay as much down on the mortgage as possible before the renewal date to reduce borrowing costs. In the first years of a mortgage, most of the payments go to interest, not paying down the principal.
Experts note that over a 25-year amortization, the interest paid can easily equal the amount borrowed. On a $400,000 mortgage at 2%, total interest costs over 25 years are $108,141. But at 6%, that rises to $367,766.
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