The Bank of Canada is expected to increase rates again in the next week. Currently, 5-year mortgage rates are between 5 – 6%. The variation is based on if the downpayment is below or above 20%. In Ontario, with less than 20% down and CMHC mortgage insurance, the rates are lower than if more than 20% is used as a down payment. The anticipated rate increase is in the .25% range. If you go back to the rates in 2021, prior to the increases, a 5-year rate could be had for around 2%. A 1/4 % increase will add an extra $107/ month to the mortgage payment for a mortgage of $750,000. This is not make or break for many Buyers however, comparing the rates today to a few years ago the payment on the above mortgage is $1,500/ month more. That will buy a lot of wings at The Crooked Uncle.
Is there an upside in rates increasing?
When rates increase, or when there is a feeling that they are going to bump up, Buyers start to move quickly. If a Buyer has a pre-approval, they need to buy within 90 days to capture that lower rate from the date it was issued. What a pre-approval does is lock in a mortgage rate for a 90-day period, however, if a home is not closed within that time period, the Buyer loses the lower rate and would be required to assume the increased rates. Another thing that happens when a Buyer has a pre-approval that is mid-way through the 90-day period is that they contact their mortgage representative and have the pre-approval renewed allowing them more time to purchase and close on a property.
Commonly when rates jump up a bit the market stalls out for a week or so, as people become accustomed to the higher rates. This stall has an impact on sales and if a homeowner is very determined to sell, it may be an opportunity for a Buyer to get the home at a reduced price. A timely example is that year to date in Oshawa the average detached home has sold for $907,000 and for the first 10 days of July, with a mortgage rate increase in the news, the average had dropped to $877,000.
In the springtime, when rates rise the impact is lessened with lowered inventory. What we see when we have a ¼ % increase in spring rates is that there is almost no decrease in sales activities. When Buyers are buying hoping to get in by summer, they absorb the increases in stride, however, in the summertime when demand decreases and inventory builds, the rate increases can slow the market down as we lose some Buyers to holidays and sitting on patios sipping wine rather than touring homes in the 80-degree weather.
If you look at the market on a long-term basis, you will notice that everything cycles, including mortgage rates. During my career, I have seen 5-year mortgages as high as 14% and as low as 1.5%. If you need to renew your mortgage, it’s best to look at a 2- or 3-year term. There is a good chance by the end of a year or two the rates will relax and come back down. The only thing that has never cycled is home values… they have constantly gone up since I bought my first property in 1984. It was a condo I paid $62,000 for that currently is selling for $500,000. There is always an upside when you are thinking long-term.
If you are a Buyer, get out and buy now. For Sellers the upside is a flurry of pre-approved Buyers needing fast closing dates. This year is full of surprises… and will most likely continue to bounce all over the place.
If you need any help, assistance or intel on the market I can be reached at lindsay@buyselllove.ca or 905-743-5555
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