February 26, 2018

Should Home Buyers Worry About Rising Interest Rates?

If you’re an aspiring first-time home buyer in Toronto, we get it: It seems like everything from government intervention, rising home prices, and increasing mortgage rates are conspiring against your jump into the housing market. While it’s true that it’s now harder to qualify and afford a home than perhaps it ever has been in the past – at least in Toronto – we’re here to tell you it’s not as bad as it may seem.

Sure, regulations are tight and there are no signs of loosening. And home prices have been on a seemingly endless trajectory.

However, it’s not as dire as it might seem. At least in terms of mortgage rates (yeah, that stress test and average Toronto home price are still tough pills to swallow).

Mortgage Rates: A Brief History

First, let’s talk about today’s mortgage rates. Sure, they’re on the rise; the Bank of Canada has made three increases to its overnight rate target three times over that period. It increased the rate from 0.5 per cent to 0.75 per cent July 12, 2017. Then, on September 6, the BoC acted once again by increasing the rate to 1 per cent. Most recently, at the end of January, the Bank increased its target by 25 basis points to 1.25 per cent.

Mortgage rates have correspondingly increased with each of those policy moves. Most recently, the best five-year fixed mortgage rate jumped from 2.79 per cent on Jan. 15 to 2.94 per cent a day later. Mere days after that it was up to 2.99 per cent, which is the current best five-year fixed rate mortgage rate offered in Toronto.

Are these increases really worth fretting about?

Let’s take a look back at some previous eras to put today’s mortgage rates into perspective.

Not your Parents’ Mortgage

You’ve heard stories that start something like this: “Back in my day our homes cost us next to nothing.”

While that may be true – the average Toronto home price sold for $90,203 in 1981, for example – buyers in that era paid much higher mortgage interest rates.

The Bank of Canada’s five-year fixed rate was priced at 21.75 per cent at its peak in August 1981.

Assuming a homebuyer paid the posted rate on the average home at the time, and was able to scrounge 20 per cent as a down payment, the monthly mortgage payment would have been $1,260 amortized over 25 years, according to Ratehub’s mortgage calculator.

You may be sitting there thinking, what an affordable mortgage! Sure, a $1,200 mortgage seems like next-to-nothing. In 2018, at least.

However, we haven’t considered inflation yet.

According to the Bank of Canada’s inflation calculator, that mortgage in 1981 would cost $3,181.62 per month in today’s dollars. Of course, 1981 was a long time ago. So, let’s look at a more recent example.

A Decade Ago

Back in 2008 (can you believe that’s already 10 years ago?) the average Toronto home sale price was $379,347. Not bad. The best discounted five-year mortgage rate, meanwhile, was 5.89%. So, what would it have cost to own a home back then?

According to Ratehub.ca’s mortgage calculator, it would have cost $1,922 per month (again, assuming a 20 per cent down payment amortized over 25 years) or $2,264 in today’s dollars.

Today’s Comparison

The average home sold in Toronto went for $736,783 in January, according to the Toronto Real Estate Board. Assuming, once again, 20 per cent down an average home would cost $2,786 per month at today’s best rate. That’s not an insignificant increase from 2008’s cost, admittedly.

But that just means buyers today will have to temper their expectations.

Perhaps a condo may be the right move. At an average selling price of $507,492, a typical Toronto condo could cost $1,919 per month at 2.99 per cent.

There are also plenty of properties available below that price in Toronto – a real estate agent can help you find more affordable pockets within the city.

For some, though, today’s reality may mean having to look outside the city.

Either way, if history shows us anything it’s that mortgage rates are still historically low and a little creativity and open-mindedness can still land you in a home of your dreams.