Rising Interest Rates and Real Estate: How Will Rising Mortgage Interest Rates Impact BC?
Canadians have been enjoying extremely low interest rates for years now, and with news that the Bank of Canada is raising its key interest rate by another quarter of a percentage point, up to 1 percent from 0.75 percent, Vancouverites are freaking out a bit.
With that being said, this long lived time of ridiculously low interest rates was bound to end – The Bank of Canada’s benchmark rate remained unchanged at 0.5% for 7 years, until it was raised to 0.75% in July 2017.* Many economists believe this recent interest rate hike will be the first of a few hikes that will see the prime rate rise to 1.5% next year….still incredibly low by historical standards, but a significant change nonetheless.
Low interest rates have fueled Vancouver’s real estate market for years. So what does this mean for prospective Buyers, Sellers and Homeowners?
How Do Rising Interest Rates Affect Buyers?
First, let’s put interest rate hikes in perspective, in real dollars.
Example: You purchase a $625,000 home with a 20% downpayment, leaving a $500,000 mortgage balance. Amortized over 25 years, your fixed rate payments would be:
- At 2.50% – $2,240 per month
- At 2.75% – $2,303 per month
- At 3.50% – $2,600 per month
We can probably all absorb an extra $60 payment a month. But $300? That’s not pocket money for most of us.
If you’re thinking of buying in the near future, there are a couple of ways this interest rate increase is going to affect you:
Interest rate hikes make buying more expensive:
AKA lock in your interest rate now so that when you do purchase, if you time it properly, you’ll be able to enjoy the benefits of a lower interest rate for a period of time. [given that you’re a fixed term] Just like the previous example, a difference in 1% interest rate hike [2.5% to 3.5%] on a $500,000 mortgage amortized over is $360! Interest rates rising translates to your monthly mortgage payment being more expensive.
Rising interest rates affect your affordability:
Lenders are already cracking down on the rules about lending, and the interest rates will impact that further. The higher the interest rate goes the less your affordability will be. For example: A family earning $150,000 per year with a $50,000 downpayment can afford a house at $677,297 when interest rates are at 2.67%.
- At 3%? That number drops to $659,539.
- At 4%? $609,901.
- At 5%? $565,483.
If you are thinking of purchasing sometime in the next 12 months, then you might want to consider chatting with a mortgage broker now. They’ll be able to advise you on a timeline that fits your needs, and who knows – you may be able to purchase sooner than you think. If you’re looking for a mortgage broker, give us a call at 604-765-0376 and we can send you some different options for brokers for you to choose from!
How Do Rising Interest Rates Affect Sellers?
If only I had a crystal ball.
In the past, when big news like this hits it has resulted in increased short term buying activity. Why? Because buyers are scrambling to find a home within their interest rate hold period to avoid a higher mortgage payment. Clients that do not need to purchase and only need to sell their property may have an opportunity to cash out and generate a multiple offer scenario of hasty buyers.
With that being said, buyer psychology is hard to determine. The motivated buyers [buyers that have already sold a property and need a home] will likely act as previously mentioned. However, investors that are in no rush to purchase may see an interest rate hike as a reason to wait for affordability to decrease and prices to come down. This specifically applies to the buyers that are purchasing all cash, as they will strictly be focusing on the speculation that prices will drop post interest rate hike.
How Do Rising Interest Rates Affect Current Home Owners?
How the rising interest rates affect current home owners largely depends on the type of mortgage that you have. When you first got your mortgage, you would have made some important decisions:
- Amortization period: usually 25 or 30 years
- Mortgage term: between 1 & 5 years, for example a 3 year term
- Type of mortgage: fixed or variable
- Interest rate
Fixed versus variable rates
If you chose to go with a variable rate mortgage then the interest rate increase will definitely affect you. In the scenario of a variable rate mortgage, the amount of your monthly payment floats with the bank’s prime interest rate. Therefore if the prime interest rate goes up, then so does your monthly mortgage payment.
A fixed mortgage means that your rate is fixed for the length of your term. At the end of your term, your mortgage will come up for renewal and you’ll be subject to the current interest rates. If you had a shorter term and your current interest rate is lower than today’s interest rate, then your mortgage payment will go up upon renewal.
A note on variable rates: Most variable rate mortgages have an option to switch to fixed rate if you’re not so fond of the inconsistency or are scared of a market of rising interest rates. Contact your mortgage broker if you’re on the fence of switching, they’ll be able to give you their expert advise based on your wants & needs and their predictions.
Is It Likely That Supply Will Increase as a Result of the Interest Rate Rise?
The idea here is that interest rates will rise and will result in people not being able to afford their current mortgages. As a result of that, they will be forced to sell their homes and supply will increase.
I highly doubt interest rates will go up so high and so fast that masses of people won’t be able to afford their houses anymore and be forced to sell. However, as illustrated in my previous examples the interest rate increase will certainly make your monthly payments more expensive.
People do not typically purchase at their absolute maximum affordability, and should therefore have a little bit of room to account for interest rates rising over time. Furthermore, the stress test for low ratio mortgages in the past was implemented to avoid defaulting in the case that interest rates rose. [Related Article: Mortgage Stress Test Information] As a result, I do not think that it is likely that supply will increase dramatically as a result of the interest rate rise.
I hope that this blog answered all of your burning questions about the rising interest rates and real estate. It certainly will be interesting to see how the next couple of months pan out in terms of supply and demand, it has all my economist gears turning! [yes I am a nerd] If you are thinking of buying or selling in the near future and have more questions about how the interest rates will affect you, then give us a call at 604-765-0376. Prefer text? 604-319-0200 or email firstname.lastname@example.org to start a conversation.
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