Mortgage Rates: How Low Should You Go?
Filed under: Buyer Beware, Budgeting & Planning, Debt, Family Finances, House & Home, Investing, Real Estate, Store Flyers, Mortgages, Your Home
If you're in the market for a new house or simply looking to
renew your existing
mortgage, I'm sure you've noticed the "Mortgage War" being waged by most of Canada's big banks. RBC, TD, Scotiabank and BMO have been offering long term, fixed rate mortgages for 2.99 per cent. This is among the lowest fixed rate mortgages you're likely ever to see.
On the one hand, this has been a bit of a strange move from an industry that has expressed worries in the past about mortgage debt in Canada. On the other hand, now might be a terrific opportunity for first-time buyers to get into the market. So, what should you be conscious of if you're thinking about a rock-bottom mortgage rate?
1. Lower interest rates may mean higher house prices.
If you're looking to get into the housing market for the first time in any large or mid-size city in Canada, you're probably already on the brink of being priced out of it. There are a few reasons for this, including foreign investors buying up Canadian houses at inflated prices. The most important reason though is historically low interest rates. Rates have been so low in recent years folks have been willing to borrow huge sums of money either through loans or credit lines. This has been particularly true in the mortgage market where first-time buyers are getting pre-approved for houses they never thought they could afford. Knowing that buyers are desperate to capitalize on low rates, sellers inflate their asking price well beyond the house's real value. With a whole crop of new borrowers entering the market armed with four or five year amortized mortgages at 2.99 per cent, look for Canada's housing prices to keep inflating for some time yet.
2. You might be in debt for a looonng time.
The banks are offering low rates and long amortizations (the maximum 30 years in some cases). This appeals to people who are really extending themselves to buy their first house or looking to upgrade to bigger digs in a manageable way. Some other bells and whistles on offer include the ability to "double-up" or speed up the payments but since many potential customers are attracted to the low rate because of the opportunity for reasonable cash flow it's unlikely they'll take advantage of these options.
3. That rate's going nowhere but up.
The appeal of being locked-in to a low rate for four to five years is undeniable but the chance that you'll be able to renew at that rate isn't very good. Government and Bank of Canada officials have indicated they're concerned about the overheated housing market. One of the few things they can do to cool it down is raise interest rates. Here's some quick math: if you get a $500, 000 mortgage for a five-year term at 30-year amortization, you'll be paying about $2,100 a month. Say you go to renew for another five years and rates have risen to more normal levels (maybe four per cent), now you're paying closer to $2,400 a month. You'd better make sure you're bringing in another $300 a month to cover that difference.
renew your existing
mortgage, I'm sure you've noticed the "Mortgage War" being waged by most of Canada's big banks. RBC, TD, Scotiabank and BMO have been offering long term, fixed rate mortgages for 2.99 per cent. This is among the lowest fixed rate mortgages you're likely ever to see.On the one hand, this has been a bit of a strange move from an industry that has expressed worries in the past about mortgage debt in Canada. On the other hand, now might be a terrific opportunity for first-time buyers to get into the market. So, what should you be conscious of if you're thinking about a rock-bottom mortgage rate?
1. Lower interest rates may mean higher house prices.
If you're looking to get into the housing market for the first time in any large or mid-size city in Canada, you're probably already on the brink of being priced out of it. There are a few reasons for this, including foreign investors buying up Canadian houses at inflated prices. The most important reason though is historically low interest rates. Rates have been so low in recent years folks have been willing to borrow huge sums of money either through loans or credit lines. This has been particularly true in the mortgage market where first-time buyers are getting pre-approved for houses they never thought they could afford. Knowing that buyers are desperate to capitalize on low rates, sellers inflate their asking price well beyond the house's real value. With a whole crop of new borrowers entering the market armed with four or five year amortized mortgages at 2.99 per cent, look for Canada's housing prices to keep inflating for some time yet.
2. You might be in debt for a looonng time.
The banks are offering low rates and long amortizations (the maximum 30 years in some cases). This appeals to people who are really extending themselves to buy their first house or looking to upgrade to bigger digs in a manageable way. Some other bells and whistles on offer include the ability to "double-up" or speed up the payments but since many potential customers are attracted to the low rate because of the opportunity for reasonable cash flow it's unlikely they'll take advantage of these options.
3. That rate's going nowhere but up.
The appeal of being locked-in to a low rate for four to five years is undeniable but the chance that you'll be able to renew at that rate isn't very good. Government and Bank of Canada officials have indicated they're concerned about the overheated housing market. One of the few things they can do to cool it down is raise interest rates. Here's some quick math: if you get a $500, 000 mortgage for a five-year term at 30-year amortization, you'll be paying about $2,100 a month. Say you go to renew for another five years and rates have risen to more normal levels (maybe four per cent), now you're paying closer to $2,400 a month. You'd better make sure you're bringing in another $300 a month to cover that difference.
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