Mortgage Update

“As expected, the Bank of Canada increased rates for the 5th time in 15 months. They will continue to increase rates 3 more times by the end of 2019, which will mean a 2% jump in rate from 2017 to 2019. Not catastrophic but coupled with both stress tests (2017 and 2018), and, a slowdown in housing sales, not ideal either.

Here’s what I think. I’ve been watching the mortgage market for years now, and, I have always maintained this stance: the only way to control a market like this is by raising interest rates. We have seen literally a policy change every year for the past 8 years but rates always remained low during that time. We didn’t see a change in prime rate in over 7 years (!!). So now that we have seen 5 jumps in rate AND 2 major stress tests, we’re seeing the effect of a rising rate market.

If people are really as worried about rising rates as I think they are, they should buy a house, and soon. Rising rates have two impacts:

1. They make it more expensive to keep a home (duh)

2. They make it more difficult to qualify for that home, too (ouch)

The second point is what’s important here.

We know from my previous email that a 1% jump in rate = a 9.6 reduction in qualifying ability. Another thing to note is – a 1% jump in rate also = a marked difference in how much of your payment goes to interest.

Example – $100K at 3.7% means 43% of your payment goes to principal over 5 years.

$100K at 4.7% means 33% of that payment hits principal, and, your payments are 12% higher per month.

It’s important because people who chose to wait will end up paying:

1. More in payments

2. More in interest

And will take longer to pay this huge debt off.

We also know it’s important because Canadians love debt. And, mortgages are an amazing way to FORCE yourself to save money (that principal component I was talking about is a forced-savings model). And, according to this study, owning a home is cheaper than renting.I’m not here to push anyone into buying a property. My goal is simply to educate them about what they can do about it (buy now!) vs what happens if they wait (pay more!). Will house prices fall by an equivalent 12%? I doubt it.

One final comment on RATES. I want to make one thing clear here because there’s a lot of confusion.

• Variable rates move by the Bank of Canada policy.
• Fixed rates move based on the 5 year bond yield.

They do not always move lock-step with each other. The margin is shrinking, so going fixed makes sense. However, fixed rates have not moved today and are unlikely to (we already saw a bunch of increases last month).

Food for thought! As always I welcome any and all comments, feedback, criticisms and most of all, buyers to work with!Jake Abramowicz