On October 24th, the Bank of Canada, BoC, raised its interest rates from 1. 5 percent to 1.75 percent. While this latest increase was expected, it has still left financial experts feeling anxious about the current and future state of the housing market. This increase is the highest rate jump since December 2008 and the fifth increase in the last 15 months.
Policy makers continue to defend the increasing interest rates saying that the hikes are necessary in order to keep inflation close and the economy strong but that is of little comfort to those working in the real estate market. Many realtors are worried that the higher interest rates will have severe and long lasting effects on the current housing market. They are even more apprehensive about the effects these continued rate hikes will have on first time home buyers.
Along with the ongoing increases, financial and realty experts are also leery about the wording that the BoC has been using, or rather, not using in their latest statements. In previous releases, the BoC has stated that interest must be raised gradually in order to keep the borrowing rates close. However, they have recently removed the word “gradual” from their statements, leaving many to believe that the increases are going to happen at a much faster rate than initially expected.
While the increases might seem small to the average borrower, the fact is that even the smallest increase can quickly add almost $400.00 more to your monthly household bills. Currently, more than half of all Canadians are living with excessively high debt levels. Raising bank rates could put many mortgage holders in a debt bracket that far exceeds their income. For those who are already struggling each month to pay their bills, these continued increases are likely to cause severe and long lasting financial damage that many might never recover from.
For new home buyers, the outlook is even bleaker. As the rates continue to climb, it is only going to become even more difficult to buy a home. Every time the rates increase by even a mere one percent, the affordability rates for first time home buyers decreases by a staggering six percent. That is six times faster than the interest rate increases.
With stricter changes being enforced by legislation in relation to down payments and mortgage calculation policies for new home owners, the rising interest rates will soon squeeze most first time house hunters out of the real estate market completely. So, if you are considering buying your first home in the next few years, you need to consider your options sooner rather than later if you hope to own real estate. For many first time shoppers, if they do not act now, their chance of owning a home will soon become the impossible dream.
First time house buyers today must have a large down payment of at least five percent or more of the value of the home saved first before they will even be considered for a loan. That means that for a $300,000.00 home, a first time buyer must have a minimum of $15,000.00 saved for a minimal down payment. This does not include all the other legal and personal expenses that are part of buying a house. Because most Canadians today are living with excessively high debt, saving money has become more challenging. As the interest rates continue to spike, the prospects of buying a first house will become even less unlikely for most Canadian hopefuls.
To put this into perspective, using a purchase price of $400,000 and 5% down payment, the mortgage amount would be $395,200, including the Default Insurance Premium with a fixed five year fixed rate of 3.49%. At 25 year amortization, the payment would be $1.973.00 per month. As the BoC’s interest rates continue to increase, the monthly and term increases over the next two years would be:
2019: 4.5% – $2,187.00/ month = $214.00 monthly increase and $12,840.00 term increase
2020: 5.5% – $2,412.00/ month = $225.00 monthly increase and $13,500.00 term increase
With most Canadians living with high levels of personal and household debt, these steadily increasing bank rates are starting to worry many homeowners. Since June of this year, the BoC has raised their rates by a total of six percent. That means that nearly one third of all Canadian home owners are now living with the very real fear that further increases will push them to the brink of bankruptcy. These increases are even more perilous for first time home buyers because their higher debt loads are making it almost impossible to save the money for a down payment while soaring housing markets are keeping prices higher than most first timers can realistically afford. As the interest rates continue to rise, the gap between dream and reality will grow even wider for novice house hunters.
The BoC will be releasing their next quarterly report in December and their full report in January 2019. Experts are predicting that the BoC will raise their interest rates by another two percent before the end of the year. For new home owners, and those already struggling to pay their monthly debt, this hike will have catastrophic effects. Serious first time home hunters must act fast if they hope to own their own property. They must establish a clear and viable financial plan to ensure that they will be able to afford their first home now and in the long term.
The instability of the market during the first half of 2018 has added to the concerns of many financial experts and institutions. Stalled trade negotiations between Mexico, the US, and Canada spiked prices and put some industries on very shaky grounds. While the USMCA has finally been signed, stabilizing trade between the three North American countries, ongoing tensions between China, and European countries with the US is affecting prices here as well. Add other global instabilities and economic uncertainties and most Canadians are walking a very fine line when it comes to their home buying options. As the prices for products and services continue to skyrocket, so too do the prices for homes in most major cities. For first time shoppers, the prospects are even more treacherous because most people new to the real estate market do not have enough savings or assets to take on a huge financial obligation. Already, nearly one third of home buying hopefuls are being priced out of the inflated housing market.
For the last 15 months, the BoC has been steadily increasing their lending rates and all predictions indicate that the rates will continue to escalate more quickly than most experts initially predicted. The recent omission of the word “gradual” in the BoC reports has many experts worried that the increases are going to happen much faster than initially believed. For debt heavy Canadians, these rate increases are putting almost half of all homeowners into a financially perilous position.
For first time home buyers, the risks are even higher. Most debt riddled prospects are already struggling to save the five percent down payment. Adding escalating interest rates will only make it more difficult for house hunters to buy their first home. Knowing that this trend will be continuing in the long term, those wanting to buy their first house need to act now if they want to see their dream of home ownership become a reality.