There’s been a lot of discussion surrounding interest rates and the housing market as well as what should and what will happen. For this post, we’re tackling these topics and whether you should still be considering buying or selling.
1. Interest Rates
It’s important to know that the advertised rate is not always the rate you will get as a borrower. Rates are tiered and based on whether you have more or less than 20% down. It may seem counterintuitive but if you put down less money, your rate may be slightly lower! If you were to put 20%+ down though and ask for a 30-year amortization, there’d be different rates offered based on 20-25%, 25-30%, and 30-35% down. There are other factors like whether you are refinancing or purchasing an investment property that will translate to a higher rate when compared with a traditional purchase or renewal.
Pro-tip: In Canada, if you have 65% or less loan-to-value (or 35% down payment or equity), you could get offered very similar rates to someone who is purchasing with less than 20% down for a purchase or switch transaction (not to be confused with a refinance).
Myth: The rate you see is the rate you’re going to get no matter your situation.
Fact: The rate you’ll get is dependent on factors like your down payment (less or more than 20% and by how much), the objective with the property (owner occupied, second home or investment/rental), if it’s a refinance or switch (which are not treated the same), and amortization period (25 years or less versus 30 years).
2. Housing Market
So, given everything that’s been going on, what’s going to happen to your home? There has been a lot of talk about people who bought at the peak of the real estate price boom while, at the same time, getting the lowest interest rates in history. The concern is that the market is now shifting, prices are decreasing, and people will be “underwater” with respect to their mortgages (meaning they’ll owe more than the house is worth).
Understood, that’s not good BUT those individuals won’t automatically lose their homes because banks don’t typically call mortgages on paying customers. If you pay your mortgage, the bank is happy! This isn’t the first time house prices have decreased either. Banks have seen this before and hate taking homes from customers so much that they generally will not except as an extreme last resort. The “power of sale” process of a home is time and resource-consuming, expensive, and the bank can take no profit by law (they can only recover their expenses).
Myth: If you owe the bank more mortgage than your house is worth, you will automatically lose your home.
Fact: This is not the case as banks don’t typically call mortgages on paying customers, so if you pay, the bank is happy. If you’re underwater, they will still renew your mortgage as long as you’ve been paying them the whole time. If you bought your house to live in and can hang on long enough, then, historically speaking, prices will go back up and you’ll be fine.
3. Past or Present?
Those who purchased a new home at the peak of the recent real estate market boom are concerned that they overpaid and wonder what difference waiting would have made on their investment. Alternatively, people who couldn’t buy in the peak are currently wondering if now is the best time to purchase. Other buyers are waiting on the sidelines with the thinking that having patience and buying in the future will be most beneficial.
For the Ottawa market, and assuming an owner-occupied home…
- A buyer who purchased their home for $800K at the peak of the market boom (with the minimum down payment including default insurance) at a 2% fixed rate, would have a payment of $3,280 per month
- A person who waited thinking the market would dip and working with the updated interest rates would achieve a similar payment of $3,265 per month with a mortgage on $590K at 4.5%
The idea that the first person’s $800K home has dropped $210K is just not realistic in the Ottawa market. In the end, neither buyer is wrong. Those that bought during the peak paid more for their home but less on interest. Those that buy now might pay less for their home but with more interest. If you bought your home to live in and plan on being there for a while, neither buying in the pandemic nor today is a bad decision!
Myth: Buying a home in Ottawa during the peak of the pandemic was a bad investment.
Fact: Not necessarily. Values have changed but not as drastically as seen in other Canadian cities. Historically, the biggest dip seen in Ottawa was 11% which rebounded a mere two years later.
Myth: Buying a home in Ottawa now is a bad investment.
Fact: With the assumption that you’re buying property and holding onto it, even with slightly higher rates, you will still make gains on your real estate investment historically speaking.
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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