Just a few months ago, all anyone could talk about was the red hot housing market. Sky high property values. Historically low interest rates. It’s amazing how quickly the conversation can change. As expected, the market has cooled. And while we’re not necessarily in a buyer’s market just yet, things are certainly trending that way. If you’re looking to purchase an additional property, or you’re a first time homebuyer, this could pose an opportunity.
How We Got Here
The pandemic may have given us rock bottom interest rates, but it also gave us something most of us weren’t expecting: inflation. Supply chain issues and consumer demand for goods have caused historic inflation. Now, the Bank of Canada is charged with the task of calming inflation, and a surefire way of achieving that is by raising interest rates.
How It’s All Playing Out
If the government’s intention was to cool things down, mission accomplished. Inflation may still be raging, but home prices are starting to drop. Houses are sitting on the market a little bit longer. I’ve even seen a few situations where owners weren’t able to sell their homes because they were expecting them to be worth much, much more. Unfortunately for some, this trend will continue.
On the buyer’s side, things aren’t much easier. Higher interest rates may be cooling the market, but they also make it extremely difficult to qualify for a mortgage. The stress test is now as high as 6.49% which is far above any qualifying rate we’ve seen in the past 15 years. As a result, the average Canadian has access to less of the cash they need to purchase a home.
What To Expect
The Bank of Canada has already hinted that we’re in for another round of rate hikes in June. No doubt, rate hikes are necessary to battle inflation. But are they going too far? Raising rates mean less cash in our pockets. Less cash means less spending. Less spending means lower profits for businesses, and as a result, less hiring.
We could very easily land in a place where the unemployment rate spikes, which is when we could see a lot of people defaulting on their mortgages. Higher rates don’t cause defaults; unemployment does. Which is why the BoC needs to be extremely careful in their balancing act of rising rates. In my opinion, the job is done. Things have cooled. It would be unwise to continue hiking interest rates at every future meeting.
The Bottom Line
At times like these, people with variable rate mortgages start to get scared. My advice? Don’t be driven by fear. Focus on the big picture. If you took a variable rate last year or the year before, you’re probably enjoying a rate of around 1.00% less than prime. Prime right now is 2.20%. That means even with a 0.50% hike, you’ll still have a mortgage rate under 3.00%. That is very, very good relative to variable rates of the past – nevermind relative to current 5-year fixed rates of 4.24% we’re seeing at the banks.
The fixed rates are tempting, but you still save in the long run with a variable rate. All of my properties are at a variable rate. Why pay at a higher rate? And why deal with the penalties associated with fixed rate mortgages that could cost you up to 15 months of interest? I recently heard about a fixed rate mortgage penalty that totalled $84,000!
Don’t be lured in by the perceived “security” that comes with fixed rates. These could cost you in the long run. But if you’re ever unsure what’s best for you, always, always consult a professional before making a big decision.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; email@example.com