Rising Interest Rates, Now What!?
Can you imagine a 21 % interest rate!? I definitely do not want to, but the reality is that in 1981, interest rates were 21%! That means that even if your house cost $150-200,000 you would be paying more than $2,000.00 per month on your mortgage back then! You could buy close to a half a million dollar home last year and pay that much on your mortgage per month. With interest rates being at an all time low for years now, a lot of people have no idea what its like to have interest rates that high.
Interest rates have been slightly increasing recently. The Bank of Canada decided to raise interest rates for the first time in seven years on July 12, 2017 from 0.5% to 0.75%. With a second hike on September 6, 2017 to 1% and a third on January 17, 2018 to 1.25%. These rate increases have come as a complete shock to some. With Canadian household debt at a record high, it doesn’t take much of an increase to have a big impact. Many Canadians only have $100-$200 left after all their bills have been paid as extra cash. That’s not much room to work with, which is why so many Canadians have become very concerned with this pattern of increasing rates.
With more increases likely to come this year, what should we expect to happen? For those with a fixed mortgage rate, you will not be affected until it is time for renewal. Those who will be affected immediately will be those looking to purchase a new property and those with variable mortgage rates. For someone who bought a property for $750,000 with 20% down, a 25-year amortization period with a variable mortgage rate at 2.7%, the monthly payments would have been approximately $2,748 using the RateHub mortgage payment calculator. With a rate increase of 0.25%, the new mortgage rate at 2.95% would change the monthly payments to approximately $2,824. That is a $76 increase per month. Depending on your situation, that amount could be a lot. Many will be wondering whether they should lock in their variable rate or not. Although variable rates are usually cheaper in the long run, only those who have the extra finances available if rates increases continue should use them. First-time home buyers are usually more vulnerable to the changes that can occur with variable rates which is why they are advised to use fixed rate mortgages.
It is expected that we will go through at least one more interest rate increase this year. With all the changes being implemented recently in the real estate market, it is extremely important to keep up to date on these changes and to make sure that you understand how these changes will affect you personally. Follow me on Twitter and Facebook where I provide updates on changes with the real estate market and feel free to contact me anytime with any of your questions.
