Will We Go Back to 5.9 % Mortgage Interest Rate ?

By Paul Hudson
Published: Aug 9, 2013

 

At a social gathering earlier this summer, a gentleman told me he had decided to forgo his real estate purchase because he received news that real estate is about to decrease 10 per cent. 

This intrigued me as I asked what kind of real estate is about to decrease by this percentage?

And in what part of Canada will this happen…Saskatoon? Toronto? Dentville?  

Of course we didn’t arrive at a substantive answer since the news given was not based on factual evidence specific to our market.

Even if the news was based on factual evidence and based locally, a 10 per cent drop for a $900,000 house in the Garibaldi Highlands does not equate to a 10 per cent drop for the price of a townhome in Brackendale.

For starters perhaps the $900,000 property was over-valued or maybe the owners needed to sell quickly due to a job transfer.

Shortly after this conversation took place, the five-year fixed interest rate increased from 2.89 per cent to 3.49 per cent at most of the financial institutions across Canada.

What this equates to is a 21 per cent increase in interest costs over the next five years for my new party companion, should he find his ideal home reduced in value by 10 per cent.

Based on a mortgage of $400,000 the 21 per cent rate increase equates to a cost of an extra $11,353 over the next five years whether property values change or not. 

Approximately five years ago, my clients were beaming with joy when I secured them five-year fixed rates closer to 5.19 per cent.

The increase in interest cost when factoring this historic rate is $43,869 or 45 per cent based the same mortgage amount above.

Is a rate of 5.19 per cent out of the question over the next five years?

If the US and Canadian economy improve like we soon hope, such a rate is not likely out of the question, perhaps it will even become the norm again.

As for price changes in Squamish since the recent rate increase, has there been a sweeping 10 per cent drop on all types of properties?

From the statistics I obtained from the Real Estate Board of Greater Vancouver, the answer is “No”.

Across the board values are up 3.3 per cent in Squamish over the previous month, based on their composite index.

So what does this mean when you head out to your next summer social and decide to talk real estate between forkfuls of quinoa salad and sips of your favourite micro-brew?

My advice is to ask your fellow partygoer “what is your reason for purchasing/financing a home?”

If the answer turns out to be “to own the home I live in”, then concerns over short-term market factors should be minimized and looked at for what they are.

Paul Hudson lives in Squamish and has been a mortgage industry expert for over 15 years.