OK, so the news says ‘Mortgage Rates Are Rising’. (Watch my live video here.)
What does this actually mean to your clients?
Well, here are 4 key points to clarify…
- The actual cost – the dollar bills, the cash money, the green:
- Who does this affect?
people with a mortgage? NO
People shopping for one? MAYBE
- Which rates are moving? IE Fixed Vs. Variable
- Does this change your client’s pre-approval amount? Are they going to qualify for less house now?
Point 1.
The math – the math is this…
Fixed rates moving from say ~1.69% to 1.94% translates into a payment per $100K of $421.00 over $409.00 on a 25yr amortization.
So we’re talking $12.00 per month, per $100,000.
The average mortgage in Canada is ~$400,000, which makes sense given that this requires $80K of pretax income.
So the difference would be ~$48.00 per month for the average CDN household.
If you want to write that math down – $1.20 per $10,000 borrowed, or $12.00 per $100,000.
But hang on a sec – Is the average CDN household affected by this change?
Point 2. – Who does this affect?
No one with a mortgage already in place.
Coming up for renewal soon, or a refinance?
OK, this might matter. Might.
And while some may think they missed out on the fixed rate bottom, well hey, there’s no guarantee that fixed rates won’t actually trickle back down again.
But even still if that fixed rate mortgage you wrote 3, 4 or 5 years ago is about to renew, it’s got a higher rate than the 2% or so rates have risen to. So you are good – your client’s payment will not be increasing.
So this news only truly impacts people shopping for a new home right now – and what a nightmare that is right now in most of Canada for a bunch of other reasons.
If you are writing say a $500K mortgage, it’s ~$60.00 per month more now, and if you are writing a $500K mortgage, your clients have to have $100K gross income to qualify which means they have about $6,000 per month after tax in hand. This rate hike is 1% of their take home pay.
Not nothing – but not really a showstopper either.
But wait, weren’t low rates allowing more buying power, isn’t that what’s driving the market right now?
Um no.
Point #3. Does this change the amount of mortgage your clients are qualified for?
(stress test @ posted rate of 4.79 or 2% above contract)
The reality here is rates can go up another ¼, and another ¼ and another ¼ and EVERYONE still qualifies for the same amount of mortgage money as they do today.
Because the way the stress test was designed, it won’t slow people’s borrowing down until rates hit 2.79% and then…. It will start to become painful for those still shopping… well a little bit anyways.
But this is why rising rates will not slow the market, not one bit. The opposite. Rising rates will accelerate the market as the risk of qualifying for less mortgage money becomes real.
- Point of clarity – Which rates are moving? IE Fixed Vs. Variable
For those with a fixed rate, or a variable rate mortgage already… this news is no news.
Everything is cool.
Oh ya, my variable rate peeps…
You might be saying hey wait what – I thought the bank of Canada said they were leaving rates alone into 2022 or 2023?
Yes, they did say so, and so far they are doing so.
So ya, this ‘news’ means zero for variable rate mortgages.
So the news of rising rates means what to who?
First point to clear up, a word is missing from these headlines – and an explanation is missing as well.
The word – fixed.
Specifically 5yr fixed.
The explanation – fixed rates follow the bond market, and the bond market was knocked on its butt back in March of 2020.
Knocked down hard and fast.
Like that 3 second knockout Donelei Benedetto was served up by ‘The Monster’…
And now, at last the bond market, a bit like Donelei… is getting back on it’s feet.
Will it do it?
Will it rise up?
Will it stay standing?
Or will another punch or two, flatten the bond market again?
We shall see.
But that’s the news here – it is fixed rates which are driven by the bond market that are moving.
No change at all to Prime which is the driver of variable rate mortgage rates – Variable remains, as it usually is, a great place to be.
As I often say ‘life is variable, maybe your mortgage should be too’.
So to recap:
1.The actual cost – 12 bucks per month per $100K borrowed.
- Who does this affect?
people with an existing mortgage? NO
People shopping for one? MAYBE
Point #3. Does this change the amount of mortgage clients qualify for?
No
- Which rates are moving? Fixed for new borrowers.