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Itty-Bitty Rate Hike, Big, Big Impact On Real Estate Buyers

23 January 2018
Kevin Hartley

5 Year Bank Of Canada Rate Rises To 5.14%

A rise in interest rates typically leads to an increase in the BoC’s posted mortgage rate, but a full increase isn’t always passed on. The overnight interest rate increase was 0.25 percentage points, while the five-year conventional rate jumped by 0.15 percentage points. The current five-year conventional rate is now 5.14%; depending on your point of view and time in the market, that may or may not seem outrageous. Nevertheless, potential homebuyers will feel the effects in a couple of ways.

By the Numbers: Itty-Bitty rate Hike, Big Big Impact, Reducing Borrowing Power By Over 1.6%!

While it seems like a small hike, the increase translates to a fairly substantial reduction in affordability. This hike from 4.99% to 5.14% reduces borrowing power by roughly 1.68%. A household earning $100,000 at a rate of 4.99%, would have qualified to borrow for a mortgage of $534,594. With an increase to 5.14%, the same household can now only borrow $525,577; that's $9,017 less house, and it will only get worse with higher rates.

I’ll caution all of this by saying the economy is doing well now, hence the increase. If the US does pull from NAFTA, that news alone could shake things up even if it takes time for them to withdraw fully. As a result, if our economy worsens because of a US withdrawal from NAFTA, it could stimulate a rate decrease in effort to stabilize negative economic effects. 

Or, not. Stay on top of things by paying attention to mortgage updates from your mortgage pro and stay in regular communication with them about your needs and options! If you need a referral - I have great people!

What This Means for Real Prices

In short, the total amount of interest paid will increase significantly. In December, the Canadian Real Estate Association (CREA) published a composite aggregate benchmark price of $600,300, representing the typical price of a home across Canada. 

Using $600,300 as an example of the extra expense incurred with the rate hike; on a conventional mortgage, you would need to put 20% down. This then brings the mortgage on a typical home to $480,240. If you had a fixed rate mortgage just a few weeks ago at 4.99%, you would have paid $446,795 in interest over 30 years, on top of the purchase price, so $927,035. 

At 5.15%, the interest paid climbs to $462,700, 30 years; a $15,905 increase for the same home. Obviously, depending on how rates vary in the future costs will get more or less expensive. Bear in mind, most people will pay a lower rate than the posted five-year BoC rate; but you see my point....itty-bitty rate hike, big, big impact. The reverse is also true.

The stress test implemented earlier this year has already impacted buyers borrowing and purchasing power. Increasing rates will have a further impact on the home buying market, substantially increasing the number of people that will be eliminated by the stress test. 

We've been advised to anticipate at least two more rate hikes this year; more will be spent on interest further reducing mortgage borrowing and purchasing power. This may inspire more home buyers to try and close a fixed rate as soon as possible. Homeowners with a variable rate mortgage might also be wise to explore the cost-benefit of locking in on a fixed rate.

Sellers; be prepared to possibly spend more time on market, seeing fewer or no bidding wars or at least fewer bidders in any bidding wars, and more relaistic (read lower) prices. You may not see what your neighbour ran to the bank with last year, but hopefully still a reaosnable profit on your investment.

Thanks for reading. Questions or ideas for a future blog? Feel free to contact me here.

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Kevin Hartley, Broker is a Toronto based real estate Broker with Better Homes & Gardens Real Estate | Signature Service, Brokerage. @Home is his lifestyle blog, an expression of his passion for home keeping though MAKING (Recipes), DOING (DIY), BEING (Health/Wellness) and DWELLING (Home Ownership, Sales & Maintenance).  Content not intended to solicit clients under contract.

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