February 14, 2011

Mortgage rates are on the rise. What does this mean for new home buyers and home owners?

Fixed mortgage rates have shot up in recent days, directly impacting first-time home buyers and home owners close to mortgage renewal. TD and CIBC were first to lead the way and increased their posted 5-year fixed rates by 0.25% to 5.44% on Tuesday. With higher mortgage rates come higher mortgage payments, and so is reduced the maximum mortgage you can afford.

Let us say you want to buy a $400,000 home with the minimum 5% down payment and maximum 35-year amortization period. Using TD’s previous posted 5-year fixed rate of 5.19%, your monthly mortgage payment would be $2,012.04. Now, with the new rate of 5.44% the monthly payment increases to $2,074.06, which is an extra $744.24 per year.[1]

Variable mortgage rates are expected to rise in the near future as well. At the last interest rate announcement on January 18th, the Bank of Canada left the prime rate, the rate which variable mortgage rates follow, at 3%. However, the central bank is expected to increase this rate given it is at an unsustainable historical low. The bank has kept the rate low to stimulate the still recovering Canadian economy, but with more favourable economic indicators, like the positive Canadian employment statistics released last week, the Bank of Canada may feel more comfortable raising the prime rate. Rob McLister, of Canadian Mortgage Trends, believes interest rates may not increase until July, while the Canada Mortgage and Housing Corporation has said they do not expect any rate increases at all this year. These forecasts, of course, may be revised following the release of additional economic indicators.

Meanwhile, housing prices, which, according to Re/Max, have increased 6.82% annually in the last decade, may fall to compensate for increased mortgage rates. The Canadian Real Estate Board (CREA) has placed a conservative estimate on falling house prices at 1.3% in 2011, while the European consulting group Capital Economics recently released a report with a bleak estimate at a 25% decline over the coming years.

On the whole, home buyers and owners should account for higher mortgage rates in their housing and monthly living budgets. If you are close to buying or your mortgage is coming up for renewal, you may want to lock in current mortgage rates sooner rather than later given the rising interest rate environment.

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[1] Calculated using RateHub.ca’s Mortgage Payment Calculator

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This article was provided by RateHub.ca, an independent, impartial mortgage rate comparison platform. We bring the most competitive mortgage rates to one place, so you can make informed and efficient decisions. We believe that finding the best mortgage rate should be straight-forward, and our website has been designed with that in mind. RateHub works with the top mortgage brokers and lenders in Canada to bring you the most competitive mortgage rates. We update our rates on a daily basis with accurate, real-time data. We also provide ongoing mortgage education and resources to assist you in your selection process.