What goes up must come down! By the same token, what goes down must come up!
After almost a decade of warning and keeping the rates same for last 7 years, the Bank of Canada has finally started to hike its Benchmark Interest Rate and as of September 2018, the Bank of Canada’s Benchmark Rate stands at 1.50%.
Every time, the benchmark rate goes up, it causes the mortgage interest rates to go up, too.
The increase of 1% in the rate just from a little over a year before along with stress test has already made it difficult for so many first time home buyers to qualify for a mortgage to buy their first home. It also has made it difficult for homeowner to refinance their mortgage with cash out.
Here is an illustration. Let’s say you owe $500,000 on your home mortgage at an interest rate of 3% compounded semi-annually for 25 years. Your mortgage payment is around $2366. If the rates inch up by a full percentage, your monthly payment will be about $2630. That is an increase of about $264 in your payment every month. By the time, the rates inch up by two percentage, your payment will go up by almost $542 per month.
Such an increase in mortgage rates can hit the real estate market with a double whammy. On one hand, the existing homeowners start to have difficulty in making their new higher mortgage payments. On the other hand, the new home buyers find it hard to qualify for their desired loan amount. That results in the drop in home prices.
So, how should you prepare for higher interest rates and higher payments? First of all, don’t bite more than what you can chew. When taking a new mortgage, leave some room for yourself to be able to make higher payments should the rates go up. Hopefully, your income will go up, too. Some banks are already qualifying the buyers at higher interest rates or lower debt ratios just to make it safe for their clients.
Second, pay-off most all of your consumer debt. Pay off your credit card balances every month so you do not have to pay 20% or so in interest on those balances. Use that freed-up money to build up savings.
Third, invest your savings at higher rates that net you some real income after paying off your taxes and accounting for inflation. Savings account in your favorite bank is not an investment by a long shot. In fact, you are being left behind in the dust. A savings account is like a hatchling in the nest waiting to grow up, fly and soar the sky. Eventually, you should also learn to fly and move up to investing and soar the skies of wealth.
Fourth, don’t let this rate hike or the fear of future rate hikes hold you back from buying real estate. Each day, you are without owning real estate, you are being left behind. Real estate is one of the best hedges against inflation; especially, if you don’t use it as your piggy bank.
This article was originally published in the September 29, 2018 issue of the Voice Newspaper. https://issuu.com/voicepaper/docs/indo-canadian_voice_realty_-_sept_2_cc39ef5ae95359