Many of our fellow Canadian families would go financially underwater
The average price of homes in Burnaby, in suburban Vancouver – ranged from $773k to $857k in July 2016.
Some savvy Canadians, well the percentage that can afford to get into Vancouver’s real estate market are looking for ‘fixer uppers’.
As interest rates have been hovering at all times lows, for the past several years, many have become accustomed to these low rates. These rates have seemingly become the ‘new normal’.
Many are making sizable down payments and locking in a mortgage rate somewhere between 2-3%; with a contractual promise that the rate will not change for a handful of years, usually 4 or 5 years.
Each day breeds a different reality. As rates fluctuate daily – no Canadian can be guaranteed such a potentially favorable rate, as from any preceding day.
Our beloved fellow Canadians, with all of us in the mix, we are making payments on the lowest mortgage rates seen in the history book going back more than 2 generations (65 years). This is not entirely a domestic effect – there are other machinations behind the scenes – as low interest rates are currently a rather global phenomenon.
Currently in mid-August 2016, Canadian banks will lend at mortgage rate between 2.5 to 3.0%, but how long will the low fruit remain hanging within reach?
Some predict a return to mortgage rates near 5%, which used to be the then-normal median rate for an entire decade prior to the banking pyramid’s adjustment of interest rates. Let’s look at the financial stress a tidal return for 5% rates would have on an enormous number of Canadian families.
The average mortgage payment on a property purchased as per today’s average home price ($503,301) would be jacked up by about $600 per month, from about $2,000 to $2600.
In pricier Toronto, payments on an average-priced home would rise by $900 per month; from about $3,000 to $3900.
In Vancouver, payments would rise by about $1100 per month – from $3,600 to $4,700!
However, a recent poll conducted by Huffington Post Canada found that half of Canadian families can’t even afford $200 increase. So, what could a rise in rates bring to so many Canadian families?
Basically Canadian households have a huge vulnerability to any hike in interest rates!
Much thought now needs to go into how Canada can fix future housing affordability issues – *before* interest rates begin to rise.
Could further tightening of mortgage rules work? Could a government policy change make it easier to increase the supply of housing by loosening currently existing land use restrictions and zoning constraints? Now with some forethought – can that be done before interest rates dramatically rise back to “retro-normal” levels?
Earlier this year The Parliamentary Budget Office predicted interest rates would rise to “normal” levels over the next 5 years. Guess what? That’s the same time-frame which most of Canada’s mortgages are coming up for renewal.
The report forecasts the high risk of Canadian households falling into a debt crisis by 2020. “The financial vulnerability of the average household would rise to levels beyond historical experience,” states the PBO report.
The crisis would be intensified by the banks (most) who are willing to lend to a completely ‘maxed out’ family.
Looking at banks’ mortgage calculators, we can see that some lenders are willing to issue mortgages that would eat up around 44% of household income. That is 14% higher than 30% – which is Canada Mortgage and Housing Corp’s affordability guideline.
Lenders are required to make sure borrowers are able to pay at the Bank of Canada’s mortgage qualifying rate, of currently about 4.6%. However, for 5-year, so-called ‘fixed-rate’ mortgages, banks are not required to make sure borrowers can handle the Bank of Canada’s rate – they are being qualified at the discount rate offered by the bank. The 5-year fixed-rate is one of the most common mortgages in Canada.
Motto of this article:
Perhaps do the right thing for your clients, and don’t recommend going for what the bank is willing to lend them. Explain that you have their best interests at heart, and they should wisely borrow what they could afford in the event that interest rates return to average historical levels. They probably will see you more as a real estate “angel”.
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