Mortgage Rates Start to Rise Again

Not so long ago, I did a post talking about the affordability of homes these days partly due to the 10% or so decrease in price in the past year (which by the way has slowed down considerably and will probably either hover in the same zone or reverse in upcoming months) and partly due to historically low interest rates. My last post, talked a bit about how sales are starting to turn around recently but it’s also becoming increasingly clear that not only sales numbers, which directly affects prices due to the old supply and demand principle,  but interest rates are starting to turn around too.
As I’ve previously stated in great detail, the short term ups and downs of property values don’t affect homeowners nearly as much as most people assume. The homeowner should buy as soon as they can afford to make the payments. After all, the prices go up and down in the short term and up in the long term. Paying attention to the details of price fluctuations is more the game of the investor who makes their living, in whole or in part, off of real estate revenue.
Interest rates however, are a different story. They affect everyone who makes use of a mortgage. And as they’re at historic lows lately and are just starting to rise, I would highly recommend paying attention to this post if you are in a position to buy real estate either for home or investment, or if you are a homeowner whose mortgage term may be up for renewal. Even if you think it’s not,  I would say it’s worth making a call to your mortgage broker to see if you can save any money.
To put it all in perspective, let me show you how the monthly payment on a $300,000 mortgage differs based on a change of interest rates. You can verify my numbers by making use of my online mortgage calculator if you like. Even better, talk to a mortgage broker. I am using 10% down and including the CMHC insurance payment on a 30 year amortization by the way. (I am not saying that these are the criteria available in the particular offers of that rate. This is for reference.) The first number is a currently advertised rate through a local mortgage broker with a three year term, the rest are of course incrementally increased from there.
3.15%     -$1183
3.5%       -$1237
4%          -$1315
4.5%       -$1395
5%          -$1478
5.5%       -$1564
6%          -$1651
6.5%       -$1741
7%          -$1832
As you can see, the difference between 3.!5% and 7% is akin to renting another place on the side. That’s a 65% increase in your monthly payment for the same equity. That’s kind of a big deal if you ask me. This is why I think that even more than usual, if you are in a position to buy, should should give it a go, now. I think it will be a long time before things are this affordable again, and by then you’ll have spent (tens of) thousands on rent.
The following is an article from the Toronto Star that reports some of the changes I am referring to. I started to hear some of this from lenders about a week ago, and then more and more, then I started to hear about huge backlogs from major lenders and finally I see it in the newspapers too. As I’ve said many times, once things hit the newspapers, they tend to become a self fulfilling prophecy fairly quickly as they have such a strong influence on the minds of many.

Banks boost mortgage rates

Deals are out there, but pricier bonds make borrowing more costly, with inflation a new fear

June 03, 2009

BUSINESS REPORTER

Canada’s biggest banks are hiking key mortgage rates at a time when the bond market is worried about risk and the longer-term threat of inflation.

Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Bank of Nova Scotia and Canadian Imperial Bank of Commerce increased their posted rates on five-year, fixed-rate mortgages by 0.2 per cent to 5.45 per cent. The changes at RBC and BMO took effect yesterday, while new rates at TD, Scotiabank and CIBC will be available today.

RBC, BMO and Scotiabank, however, also have “special offers” on five-year closed mortgages at 4.15 per cent. Those promotional rates, subject to change without notice, also reflect a 0.2 per cent increase.

Paula Roberts, a mortgage broker with Mortgage Intelligence, says rates are rising from “abnormally low” levels. Consumers, she added, still have plenty of opportunity to take advantage of lower borrowing costs because not all lenders have repriced loans.

“Even lenders that we were told were going to increase still haven’t,” Roberts said. That means both first-time homebuyers and those with mortgages coming up for renewal can still snag deals.

When asked about the best rate that she could fetch on a five-year, fixed-rate mortgage, Roberts replied: “On a quick close (within 30 days) we can still get 3.69 (per cent). On a 120-day rate hold, we can still get 3.79 (per cent).”

Five-year, fixed-rate mortgages are traditionally the most popular option for homeowners. Borrowing costs on the bond market largely influence consumer rates.

Yields on longer-term bonds have soared in recent weeks, driving up the cost of borrowing for lenders. Experts say yields are rising because the bond market is focusing on risk and the future prospects for inflation.

Central banks usually try to control inflation by raising interest rates. The Bank of Canada’s overnight rate is currently sitting at 0.25 per cent and it has signalled plans to hold it there well into 2010, depending on inflation.

The bond market, though, sees a risk that interest rates may change down the road, said TD economist Grant Bishop.

“Certainly there is the recognition that interest rates are going to have to go up both because of the need to rein some of this monetary stimulus in – once the economy gains traction – and the level of debt that is being issued by governments.”

Yields are also climbing because the market is “a little less pessimistic” about the economic outlook, said David Power, a vice-president in RBC’s corporate treasury department. If bond yields continue to rise, that will impact the industry’s pricing of both mortgages and deposits, he said.

Statistics Canada, meanwhile, reported yesterday that household demand for credit dropped “significantly” in the first quarter. Household demand for funds in the January-to-March period totalled $65 billion, down from $91 billion in the fourth quarter of 2008. Canadians, it seems, opted to save rather than spend.

“Despite the decrease in the five-year mortgage rate, net new mortgage borrowing also contracted during the first three months of 2009, as investment in residential construction and activity in the resale housing market continued to decline,” StatsCan said.

Bank of Canada data, meanwhile, suggest household credit rose 1.1 per cent in April over March, mostly with growth in mortgages and lines of credit. “Even through these uncertain economic times, falling house prices and favourable mortgage rates appear to have successfully attracted new homebuyers,” TD’s Bishop noted last week.

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