How much longer will mortgage interest rates remain low?
Let’s start this discussion with the usual disclaimers – I am not an economist and the opinions expressed are personal and may not be shared by others who are far more knowledgeable about this stuff than this writer. However, I have had a lot of conversations with people about how long mortgage rates will stay low and what would happen to them if and when they increase.
No one really knows the answer to the question “how long will mortgage rates stay low?”. Top economists, bankers and politicians are all struggling to resolve our global economic issues. Many economic problems seem obvious, and are the subject of much discussion and debate, but the solutions to those problems are not quite so clear. What is known is that the consequence of raising interest rates too soon could result in another financial crisis similar to that of 2008. Even if interest rates were to be increased (now) by as little as two percentage points many Canadian families would find they could no longer afford their mortgages.
In preparation for the increase of rates the government has been making new rules to regulate the lending industry. One of these changes requires that you qualify for a mortgage with a rate that is about 2-3% higher than the rate that you are applying for – this is called the qualifying rate. That said, it would seem to be a safe bet that the stage is being set for a rate increase in about 3-4 years from now as people qualifying for new mortgages are qualified at higher rates mitigating the exposure of lenders.
Following these rule changes, to qualify for a 25 year mortgage for $200,000 at 3% interest with monthly payments of $947.00 you need to qualify for a mortgage at about 5% with monthly payments of $1,163.00. In the event that rates went up to 6% you would probably still be able to afford $1,280.00 per month and keep your home. However, if you didn’t qualify for more than the $947.00 per month payment, which was formerly the case, it is doubtful that you would be able to afford to maintain payments and keep your house after a 2% rate increase.
Without people being pre-qualified to handle increased mortgage payments our whole economy could face another disaster after a rate increase as people would have little choice but to walk away from their homes. In summary then it would certainly appear that we are being primed for a future rate increase.
There are several simple steps that you can take to ensure that you are prepared for an interest rate increase these include the following:
- Reduce other debt obligations
- Avoid further mortgaging
- Increase income
- Consider downsizing
- Reduce unnecessary living expenses
If you need help with budgeting and getting your day to day finances back on track come in and talk to Tom there is no charge for a confidential information session.