Are Canadian Homeowners Prepared for Higher Interest Rates?

It looks like after years of near-record-low interest rates, Canadians are getting a little too used to easy money. And that could spell “financial headache” for those homeowners unprepared for the coming spike in interest rates.

That interest rate shock may come sooner than most Canadians think. According to a recent report, 31% of Canadians expect interest rates to stay the same over the next five years.1

The Organisation for Economic Co-operation and Development, on the other hand, says the Bank of Canada will probably begin raising the overnight lending rate—which tracks and impacts variable mortgage rates—in the second half of 2014.2

While that timeline might seem like it’s on the distant horizon, it’s important for homeowners to be prepared for the eventual rise in interest rates. While the Bank of Canada has not yet raised the overnight lending rate, it did say the long-term goal is still a “gradual normalization.”

What this means to first-time home buyers or those with mortgages coming up for renewal is that the cost of borrowing is going to gradually increase. Don’t let the word “gradually” fool you; it can add up, and fast!

As a result, buyers should factor this increase into the equation when planning their purchase. In May 2013, Canada’s five big banks were selling five-year closed mortgages near 2.99%; today, its 3.59%. Those 60 basis points translate into higher monthly payments and interest.

For example, back in May 2013, a $500,000 mortgage with a maximum 25-year amortization period at three percent would translate into a monthly payment of $2,366.23. Over five years, $69,346.66 would be paid out in interest.

At 3.59%, that same mortgage now means home buyers are paying out $2,520.16 per month, and over five years, $83,311.64 is paid out in interest. What happens if interest rates rise to five percent? That $500,000 mortgage now costs $2,908.02 per month, with $117,008.94 paid out in interest.

It’s inevitable that interest rates will rise; the big question is, will Canadians be able to handle the higher interest rates? With the awaited rise in interest rates not expected to occur until late 2014, now is the perfect time for first-time home buyers and those up for renewal to “stress test” their mortgage against a higher interest rate and see if they can afford it over the long term.

The experts at Canadalend.com also think it’s a good idea to consider a mortgage with a shorter amortization period. While the monthly payments are higher, the homeowner is mortgage-free sooner and pays out less in interest. A $500,000 mortgage with a five percent interest rate amortized over 20 years means paying $3,258.63 per month, with $114,018.00 going to interest.

First-time home buyers ready to take the first step on the property ladder can get a head start by getting pre-approved for a mortgage. Pre-approval lasts for 120 days and is locked in from the day you start the process. With interest rates rising, Canadalend.com warns that getting pre-approved now could save home buyers thousands of dollars in interest charges.

Whether you’re a home buyer or looking to refinance, a licensed Canadalend.com agent will research all of the major banks and lending institutions to ensure you get the mortgage best suited to meet your financial goals.

Sources:

1. “First-Time Home Buyer’s Report: One-Third Expect Interest Rates to Remain the Same Over the Next Five Years,” Bank of Montreal web site, July 4, 2013; http://newsroom.bmo.com/press-releases/bmo-first-time-home-buyer-s-report-one-third-expe-tsx-bmo-201307040884671001 .

2. Mayeda, A., “Look for rate hikes in late 2014, OECD tells Canada,” Financial Post May 31, 2013; http://business.financialpost.com/2013/05/29/oecd-canada-outlook/.

x

Apply Online in 60 Seconds & Get Approved Now!

Please note * are required fields

Loan Details

*Purpose of Loan
* Do you currently own a home?    Yes   No

Personal Details

*Title
*First Name
*Last Name
*Date of Birth
*Email Address
*Current Address
*City
*Select Province
*Postal Code
*Residential Status
*Home Phone
Cell Phone

Agent/Comments

Preferred Agent
*Please tell us where you heard about us?

Sign Up for Free Promotions*

Would you like to sign up for FREE newsletters, offers and special promotions from CanadaLend? You may later unsubscribe.

 

Terms & Conditions

I Agree

We respect your privacy

Please note, if necessary, we may require further information from you to process your application. By clicking "Apply Now" you are consenting to receiving future such e-mails from us with regards to your application.

* Your consent is sought by CanadaLend.com 675 Cochrane Dr, #104, West Tower, Markham, ON L3R 0B8
info@canadalend.com