Rising interest rates

There are several things to consider when deciding to renew a mortgage or buy a new home

There has been great discussion over the past few months from everyone from national economists to the Bank of Canada about the rising interest rates expected throughout 2011 and 2012. The Bank of Canada has been issuing warnings about Canadian household debt levels and the ability to serve those debts with higher interest rates.

In real estate, interest rates have an incredible influence over buyers, sellers and existing homeowners with mortgages. Many homeowners are running open variable interest rates and have been taking advantage of historically low rates for the past number of years. With interest rates trending higher, it may be worthwhile to review the type of mortgage options you currently have and see what is best for your household in the wake of rising rates.

Rising rates also motivate buyers to move faster into the market and to capture the lowest effective interest rate possible. The local market in Cranbrook has seen a conundrum with some buyers who are confused. Some have the opinion that market values will erode further and they are waiting on the sidelines, watching the markets closely and waiting to jump in at lower prices. A large decision with most first-time home buyers is not necessarily the cost of the home but more so the monthly carrying costs and what is affordable and manageable to their incomes.

I provided an analysis to a client who thought the markets are going to drop five per cent within the next year. If a buyer was looking to purchase a home and mortgage $200,000 with a five-year locked rate, their payments would be $1,072.74 (principal and interest) based on rates as of February 14, 2011. If that buyer waited one year and the prediction came true and the market dropped five per cent, his purchase with mortgage would now drop to $190,000. However, notable economists and the Bank of Canada predict the benchmark rate to be at two per cent, or effectively one per cent higher by the end of 2011.

If my client's prediction came true and they purchased a home one year later at five per cent below today's market, and interest rates were one per cent higher, the monthly borrowing costs actually rise to $1,125.69. Over a five-year term, the client would be paying an additional $3,000 in payments. The one year that they waited would have resulted in expending an additional $9,600 in monthly rent payments. If prices dropped 10 per cent over the next year and the client then mortgaged $180,000 for the same home, the payments would be $1066.44 per month.

Essentially taking advantage of lower interest rates can sometimes hedge in a seller's market. Home ownership is typically the largest investment and historically has always been a good investment over the long term. To time a market for entry, one has to look at all options, including current market conditions and current interest rate trends.

The Cranbrook market has seen an erosion in the average sale price of homes in the last six months of 2010 versus the first half. The first half of 2010 saw the average sale price of a single-family dwelling in Cranbrook at approximately $290,000. The last half of 2010 saw the price erode to $282,500 or a 2.7 per cent decline. Throughout 2010, we saw an average of a 96 per cent list-to-sale ratio in our markets—this is essentially buyers negotiating up to four per cent off the asking prices in 2010. Buyers are seeing better prices and are  positioned for slightly stronger negotiations from the days of 2006 and 2007; however, they are now losing the incredible advantages of historical low rates. To time a market, buyers need to analyze not just housing prices but their own household budgets and borrowing costs.

The key to analyzing your real estate purchase is to ensure that the asking price of the home is competitive in today's market. Discuss and research with experts in the real estate and mortgage industry. Working with the right professionals can save you thousands of dollars in a real estate purchase.