Big banks raise mortgage rates in sign era of historically low rates ending, Mortgage rates on the way up and RBC Lifts Fixed Rates. Big. If you follow real estate or the financial markets these where some of the headlines you woke up to this morning. The much anticipated increase in interest rates has begun. This was not initiated by the Bank of Canada as their rates have not changed as of yet. The rate increase is at least partially in response to the growing notion that the central bank is on track to raise rates in July but may do so sooner in response to inflationary pressures.
O.k. so interest rates are on the increase, how does it affect me, and is there any way that I can minimize the impact?
RBC’s new discounted rate rose 6/10th of a percent to 4.59% and TD’s rose to 4.55%. Big deal that’s not much right?
Let’s see what a difference it makes to a $200,000 mortgage. $200,000 amortized over 25 years at 3.99% will cost you $1,051/mo while at 4.59% you add $66 to $1,117/mo. That means over the course of a 5 year term you will pay an extra $3,960, and that is just in interest. That being said not all lenders have yet raised their rates so there may still be time to take advantage of the lower rates, you will need to do some shopping around.
First let’s look at what it may mean to the Real Estate market in Edmonton. Higher interest rates combined with the new mortgage rules set to take effect shortly, will not only raise the borrowing cost of a mortgage it also places new, more stringent stipulations on the qualifications required to obtain a mortgage.
In anticipation of these there may well be a flurry of activity buyers who have pre approved mortgages with guaranteed rates put in place prior to today’s rate hike. This may in turn spur a short term spike in prices as competition for properties increases.
For the buyer weighing the financial advantages of buying now as opposed to waiting: lower interest rates are attractive but prices may fall in 90 days after the activity of those with pre approved and low guaranteed rates subsides. The down side to waiting is that your home may cost you less but your mortgage may cost you more. Some economists are quoting a 0.75% jump in the bank of Canada rates and this may translate to as much as 2.5% in prime rate at the banks. If we add 2.5% to the 3.99% (6.49%) in our example above we come out with a payment of $1,338.44, equivalent to a payment on roughly a $254,000 mortgage with a 3.99% mortgage rate.
When deciding if you should wait, the price of the home is only one part of the equation, the big picture including cost of borrowing needs to be looked at. Paying a little more to lower your borrowing costs may make good financial sense when looking at the big picture.
So what does this mean for those looking to sell their home? A short term rush of activity is good, this means that there are more motivated buyers; prices may rise in the short term as savvy buyers cash in on low interest rates. As interest rates rise there is a decrease in the amount for which buyers can afford this translates into fewer buyers that can afford a specific property.
Will this create a downturn in the market? In my opinion it will defiantly cause a softening of the market and put a damper on the price increases we have seen in the past few months.
Advice: as we have seen above interest rates have a huge affect on the big picture cost of buying a home, it would be well worth getting pre approved with a rate hold at a low interest rate before all the lenders raise their rates, if you are not already.If you are pre approved find out when your rate hold expires and get out and make some serious decisions about buying, before you at are the mercy of the higher rates.
Sellers: this may also be the time for you as I said before; Buyers are trying to take advantage of low interest rates and as such are motivated. Waiting to market your home may only limit your ability to sell as higher interest rates translate into fewer buyers that have the ability to afford a specific property, fewer buyers means less competition, less competition means it will take longer to sell your home and possibly for less money.
What happens in the next 90 days will be a good indication for the remainder of the year.
The numbers I used for my financial examples are for informational purposes only; you should talk to your mortgage professional in regards to your personal situation.
Dave Dry
Realtor
Re/Max Real Estate
www.davedryhomes.com
www.davedry.ca