Talks (and actions) surrounding prime interest rate hikes and the impact it will have on the housing market are inescapable these days. With headlines claiming a quarter of Canadian homeowners will have to sell their home if interest rates continue to rise, it’s no wonder that people are concerned. The sky ISN’T falling though and here’s why…
Acknowledgments and Actions
Yes, inflation is up, fixed rates are going up, and the prime interest rate is rising. With all of these things acknowledged, it’s my opinion that the government and the Bank of Canada are raising the prime rate to spread some fear and try to curb inflation by encouraging people to not buy and invest in real estate.
You might hear statements that the government is projecting a 40%+ increase in your mortgage payment in five years (assuming you purchased through the pandemic with a rate below 2%). Just remember, and assuming that does come to pass, you can counter-balance this effect:
- Paying off your mortgage faster/sooner (a great move is to go with accelerated bi-weekly payments)
- Re-amortizing your mortgage (extending the amortization period by 5 years will drop your payment by roughly 20%)
- Increasing your income will help offset a potential increase
- Consolidating high payment and high-interest debt into a more manageable payment within your mortgage
If You’re on the Selling Side
If you are a homeowner looking to sell, or an agent working with a seller, then we have to come to an agreement that the market has shifted. Although some pockets remain hot, it is balancing out overall. What this softening means is that offers aren’t as plentiful, properties are on the market longer, and pricing has definitely cooled.
Because all of this has happened so recently, I’m suggesting and encouraging sellers to accept conditions on your sale. Banks are scrutinizing borrowers. They’re reviewing property values and general deals much more now than they’ve been doing the last two years. That additional scrutiny puts buyers and sellers at greater risk of not closing a deal. If we don’t close the deal, who wins?
Here’s a common situation I’ve been seeing recently. Our pre-approved client will offer the asking price, five days for conditions, a 60-day closing, and a deposit of $15K. The seller will counter back with the asking price but no conditions (still thinking it’s the summer of 2021) and the client will reluctantly accept. At this point, the seller thinks everything is fine because there are no conditions and the client was pre-approved.
Now, the client’s bank requests an appraisal 30 days later as part of their financing and the house is actually appraised at $25K less than the purchase price. The client has no additional funds or resources to make up that difference and decides to walk away from the deal. The seller will now keep the $15K deposit, have to put the house back on the market, and will most likely sue for the difference if the house sells for significantly less.
In this case, the seller has now lost 30+ days on the market, will have to seek litigation which comes with a hefty expense, then try to sue for damages in a court system that’s already backed up multiple years. Was all that worth trying to save on five days? Probably not.
The concerns of rising rates and costs are legitimate but seeking the right advice and doing the math will always keep you a step ahead of the concerns of what’s to come. Contact the Kyle Miller Mortgage Agent team and we’ll help guide you through these steps to best prepare you for the future!
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