I read a headline this week that I saw covered repeatedly online and on radio. (I do not own a TV however I am certain it was front and centre there as well.) It was penned by Manulife Financial; “Nearly 1 in 4 homeowners would have to sell their home if interest rates rise more.”
The sky is falling, the market is collapsing, we will see banks kicking homeowners out on the streets and selling homes for a fraction of their worth. This is what headlines such as this one are created to cause; anxiety, shock and press. This headline was repeated in most of Canadian newspapers, and I noticed it mentioned in some American media.
When I first read this headline, I was sipping a very expensive extra large Starbucks. However, like the headline, sometimes things are not what they appear to be. The drink I am sipping I made at home and is in a take-out cup, and the headline, well, a quick look at the content might reveal a different story.
Digging into what is behind the headline and looking at what is being forecasted, we find that things might not seem as bleak as predicted. Surveys, like recent political ones predicting winners and losers can be as wrong as they are right. The samples tend to be small, and this Manulife survey is projecting outcomes across all of Canada, from a survey group of 2001 respondents.
How big of an impact is the mortgage rates rising on homeowners and Buyers looking to purchase? The first thing to consider is if a borrower is looking at a variable rate or a fixed term mortgage.
A BNN Bloomberg report indicated that 71% of Buyers and homeowners have a fixed term mortgage or will obtain one when purchasing a home. Fixed term mortgages come with the security of a locked in payment if the rates increase. When a buyer takes on a variable rate mortgage, they are at the mercy of the market fluctuations. Since January we have seen a 1.25% rate increase meaning that a variable rate mortgage earlier in the year has now increased to 3.7%. The only time a fixed term mortgage is at risk is at renewal time. Most lenders allow borrowers to lock in a new mortgage rate months in advance of renewal if the rates are expected to increase. A good example of this is the mortgage on a property I own that was renewing in June of this year. As we moved into late January, all indicators were that the rates would rise as we moved into the summer. I started the renewal process early, in late January and renewed to a 3-year fixed rate of 2.7%. Had I waited, the rate would be somewhere around 4%. If I had a $500,000 mortgage, the rate would be $2,290/mth at the lower rate and $2,630/mth at the current rate of 4%. In the big scheme of things, $340/mth is not going to cause me to sell my home, or another other person for that matter. However, it does do is take some discretionary spending money from my monthly budget.
In the event a person had a variable rate mortgage of the same amount their payment would jump by $300/mth. Not an insignificant amount, but a sum that most households can manage.
When you look at mortgage rates historically, the rates we have today are lower than we have had in decades. The last time 5-year mortgages were at todays rate was in late summer 2010 and previous to then the rates from 2007-2010 were in the 7%-8% range. Looking at mortgage defaults, (lenders taking back a property for non payment of mortgage) the rate of defaults during this period of higher mortgage rates reveals that there was almost no change in the number of homeowners losing homes back to a bank, an indication of the resilience of homeowners to absorb higher rates.
Costs to carry mortgages are rising, no one is disputing that over the short term. Homeowners renewing mortgages at higher rates will see a direct impact on their lifestyles. However, when a mortgage renews, and the weekly cost goes up by less than $100. most families can manage.
What articles such as this do is fuel fear, causing people to react to increasing rates rather than to think through the process and make the best most informed decision they can. Fear is easily stoked when the articles share “horror” stories looking back into the 1980’s when rates were above 20%. A tool I used when uncertainty in the Real Estate market is to do research and develop a plan. Here are a few thoughts if you have a mortgage renewing or are considering purchasing:
For Buyers Looking to Purchase Home:
- Get pre-approved as soon as possible. Pre-approvals typically lock in a mortgage rate for a period of 90-120 days. This is your best protection to get today’s rates if they continue to rise.
For Homeowners looking to renew a mortgage or sell:
- If you have a mortgage renewing in the next year, contact your bank and determine if you can renew early. It appears that the rates will increase by ¾% in July so act fast.
- If you are forced to renew at rates higher than you are comfortable with, renew with a shorter term, fingers crossed that at the next renewal time the rates have shifted down.
- Consider renewing as a variable rate, which will lower your payments.
- If you have the means, consider making a lump sum payment prior to renewal and then one just after renewing your mortgage. What this will do is drop your principal balance allowing more of your payment to go to the principal and less to interest. (This will not help monthly, in however long term you will be in better financial shape.)
- As much as I really disagree with adding more debt to a mortgage, consider refinancing your mortgage to pay off any unsecured lines of credit. Lines of credit have rates that float monthly, and by collapsing the line of credit, adding it to your mortgage will dramatically lower your monthly payment.
We are in unprecedented times, and sometimes the best decision is to protect your investments. Locking in for a longer term, converting debts that have higher carrying costs to a mortgage, and reviewing all options available will keep your family in the same home and drop the stress levels.
If you have any questions about mortgaging, I am happy to help. If I do not know the answers I have a team of mortgage professionals who can help. I can be reached at lindsay@buyselllove.ca