By now, you have probably heard that at least one lender (HSBC) is offering a mortgage rate under 1%. It’s safe to say that this is unprecedented, but what does it really mean for buyers?
Without getting into whether ultra-low rates are good for the economy in general, we can state with confidence that home buyers who need a mortgage usually welcome low interest rates. If you are considering buying property, how much should the current lending rates affect your buying decision?
Who Qualifies for 0.99% Right Now?
It’s important to clarify that this latest rock-bottom rate is only available to a relatively small group of buyers. The offer is for high-ratio insured mortgages, that is, for buyers who have less than 20% down payment. This is the same group who pay a premium between 2.8 and 4.0% to insure their mortgage with CMHC or a similar insurer. Lower rates will definitely help offset that premium but, according to James Laird, co-founder of RateHub.ca, the 0.99 offer only targets about 10% of the current potential home buyers.
Another factor to consider is that this is a variable rate. The mortgage term is for 5 years, but the interest rate will fluctuate with the market – usually in response to the Bank of Canada’s rate changes. For most people, the variation will not break the bank – since the stress test is still in place to ensure affordability.
First time buyers out shopping for a mortgage should definitely check out this offer in the course of their research!
What About the Rest of the Buyers?
For the other 90% of potential home buyers, including move-up buyers, and even home-owners looking to re-finance, there are still very low rates available. Many lenders are offering rates under 2%. It’s not unheard-of to see rates under 1.5%.
As always, your personal credit history, your income source and reliability, and the size of your down payment factor in to the rate you ultimately will pay. Your relationship with the lender may also work to your advantage. A long-time client of a banking institution may see the best offers available.
What Do Interest Rates Mean For Your Bottom Line?
Let’s take an example of an average Hamilton home. A first time buyer with 10% to put down on a $600,000 property can take advantage of the HSBC offer. Here’s how a 25 year mortgage would look at this 0.99% rate:
- Down payment: $60 000
- Mortgage amount: $556 740
- Mortgage insurance premium: 3.10%
- Total mortgage insurance: $16 740
- Total mortgage interest: $71 810.33
- MONTHLY PAYMENT: $2095.17
To qualify for this mortgage, buyers must pass the aforementioned stress test, to ensure that they could withstand a rate increase up to 4.79% (which, by the way, is still a historically reasonable interest rate compared to the 20+% in the 1980’s!)
At 4.79%, this same purchase would look like this:
- Down payment: $60 000
- Mortgage amount: $556 740
- Mortgage insurance premium: 3.10%
- Total mortgage insurance: $16 740
- Total mortgage interest: $394 798.30
- MONTHLY PAYMENT: $3171.79
As you can see, interest rates matter.
But House Prices Are Rising Too Fast!
In the Hamilton-Burlington region, statistics for November 2020 showed a year-over-year price increase of 24.4%! Even with house prices rising, though, monthly payments are staying low.
Prepare to be amazed at how this price increase over last November, when a well-qualified buyer could get rates around 2.5%, has affected monthly mortgage payments for first time buyers:
Assuming that a $600 000 house was worth 24.4% less one year ago, the first time buyer would have paid $482 315. Let’s do the math, shall we?
At 2.5% interest, their mortgage would have broken down this way:
- Down payment: $48 231
- Mortgage amount: $451 447.36
- Mortgage insurance premium: 4.0%
- Total mortgage insurance: $17 363.36
- Total mortgage interest: $155 252.16
- MONTHLY PAYMENT: $2022.33
The difference in monthly payments between buying a $480 000 house in 2019 and a $600 000 house in 2020 is approximately $72.84. Mind blown, right?
This helps explain why the market has supported such rapid price growth.
How to Use Low Rates to Your Best Advantage
We know that rock bottom interest rates can’t last forever, and certainly not 25 years to allow buyers to finish paying off a typical mortgage. How can you make the most of this period of cheap borrowing that we are seeing now?
Most mortgage lenders have what they call “pre-payment privileges.” They will allow you increase your monthly payments and/or make a lump sum payment in addition to your regular payments once or twice a year. If you can budget to pay down your mortgage in this way, the extra funds you put toward the debt go straight to the principal amount. This directly reduces your balance owing. In five years, when you renew your mortgage at the terms available, even if rates are up, you will be borrowing much less.
It’s also important to calculate the true cost of home ownership. Be sure not to set yourself up to be house poor – don’t just buy at the top of the budget allowed by your lender. Analyze your finances to make sure you can cover all your living expenses and have a little left over. That way, you’ll have room for slightly higher payments when the time comes.
To help you calculate the cost of different mortgage options and ways to save for your first home, here are some handy calculators:
If you need help to figure out your options in the current market, or if you have other questions, call or drop us a line anytime. We are here to help!
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