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Robert McLister: One moment you're still on low interest rates; The next moment you see your finances plummeting as borrowing costs skyrocket
Published on Oct 4, 2024 • Last updated 12 hours ago • 4 minutes reading time
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Mortgages can feel like a rollercoaster ride at an amusement park. Photo by CLAUDIO BRESCIANI /TT News Agency/AFP via Getty Images
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For first-time mortgage seekers, it can sometimes be hard to understand what you're committing to. You don't just take out a loan; You plunge into a financial thrill. One moment you're traveling with low fares; The next moment you see your finances plummeting as borrowing costs skyrocket amid rising inflation.
The world of mortgages can actually feel like a financial rollercoaster.
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There are peaks and valleys
The chances of getting a mortgage rise and fall depending on your home value, interest rates, income level and debt load. When house prices rise – like they did from June 2020 to February 2022 – the affordability of a mortgage falls sharply if your income and down payment can't keep up.
At some point, however, the journey becomes quieter. For example, over the last four years, a Canadian's average paycheck has increased by 18 percent, the cost of living (officially) has increased by 18 percent, housing prices have increased by 11 percent, and average mortgage rates have increased by 275 basis points (bps). Throw all of that into a mortgage mixer and that means the average Canadian with a 20 percent down payment and no other debt can qualify for a $418,000 home today. That's close to the typical first-time buyer price and, surprisingly, it's only $4,000 less than what they were approved for four years ago.
There are unexpected twists and turns
Almost all new homeowners can comfortably pay their mortgage on closing day, but some find themselves in a bind. Sudden loss of income, accumulation of debt and rising costs are the unexpected corkscrews of this financial rollercoaster ride. Just look at one of these costs: property taxes. In cities like Toronto, where few predicted this year's 9.5 per cent increase, they are spiraling out of control. And condo fees? According to a Toronto Star report, they rose 5.51 percent last year. Add in unexpected maintenance costs (roofs, furnaces, and air conditioners don't last forever) and special condo appraisals, and suddenly you're going from a rollercoaster ride to the haunted mansion of debt.
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The anticipation is great
Despite the worrying accents and declines, should you trust the historical outperformance of variable rates? Or should you commit to a fixed tariff for several years? The decision, which will inevitably make or cost you thousands, can leave borrowers optimistic and anxious at the same time. And when interest rates skyrocket, like the 275 basis point average increase over the past four years, you could be looking at a renewal payment more than 30 percent higher. Welcome to the high stakes mortgage game.
You have to wait a long time for the drop
All mortgage lenders crave the thrill of lower interest rates, but falling interest rates take time. Barring an economic shock, it could take many months for variable interest rates to return to a level that feels less extortionate. Currently, the bond market is forecasting that Canada's key interest rate could fall by 200 basis points. But those same bond traders think it could take until December 2025.
Unpredictable duration
You don't always know how long the journey will take. You may find another home in a few years that requires an even larger mortgage. In this case, you'd better hope that your financing is transferable to the new home and that you have the ability to economically increase your borrowing without penalty. Otherwise, the price of your “Funpark” ticket could be several thousand euros higher than expected.
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In some cases, times become difficult and borrowers consider selling. You can almost always cancel a mortgage whenever you want, but there are usually penalties for doing so. For a $400,000 closed fixed-rate mortgage, that can exceed $10,000 – a thrill many wallets can't handle.
You're wearing a seatbelt
As soon as you commit to a completed mortgage, it is as if the security barrier falls into your lap. You're strapped in for the ride and can't easily get out because of the mortgage penalties. And if you buy at the wrong time with too little of a down payment and then prices drop, you may not be able to sell enough to pay off your mortgage. This doesn't happen very often, but it happened to some people who bought at a five percent discount in 2022.
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So if you're a new home dreamer thinking about your first home loan, mortgages are a fantastic tool to build home equity and retire better. But they can also be a wild journey if you're not prepared. The best way to avoid nausea is to save enough reserves. Chances are, you'll need to tap them at some point while driving.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
The interest rates shown below are updated at the end of each day and come from MortgageLogic.news' Canadian Mortgage Rate Survey. Postmedia and imagination. Online Inc., parent company of MortgageLogic.news, will be compensated by certain mortgage providers if you click on their links in the charts.
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