With much speculation that interest rates can only – and surely must – go up, local mortgage expert and broker coach Dustan Woodhouse is asked on a daily basis whether he expects this to happen any time soon.
His answer? It’s the same reply he’s been giving clients for years, as the same question emerges in every hot spring market. And that answer is: probably not – but you have little to fear even if rates do rise.
Woodhouse, a mortgage broker with Dominion Lending Centres, told a recent edition of the Real Estate Therapist show on Roundhouse Radio, “It’s not about the interest rate, that shouldn’t concern you – it’s about the effect that interest rate rise will have on the payment you make on your mortgage.”
Woodhouse pointed out that about half of Metro Vancouver home owners do not have any mortgage outstanding – “that’s our parents and grandparents” – and the average mortgage balance held on the remaining 50% of homes is around $400,000.
He added that the majority of home owners won’t be affected by an interest rate rise, as 80%-plus of mortgage payers are on a five-year fixed rate. Those who locked their rate in three or four years ago will have locked in at a higher rate than today’s, so they likely won’t see a payment rise when they renew in a year or two. And those who have more recently begun their five-year term have plenty of time to pay down the principal at the lower rates and mitigate any payment shock in four or five years’ time.
Even those who are currently on a variable rate might not see any payment increase either, says Woodhouse. Many lenders’ variable-rate mortgages don’t increase payments with a rise in interest rates, they just change the composition of what the mortgage holder is paying back – a little more interest, a little less principal.
Dollarizing the “Payment Shock”
The remaining small fraction of adjustable-rate mortgage payers, who will see payments go up with an interest rate increase, can also rest assured that it might cost much less that they might imagine, said Woodhouse.
“Let’s dollarize that ‘payment shock.’ A quarter-point interest rate movement represents $13 per month, per $100,000 mortgage, for the average mortgage holder. So that’s $52 bucks a month extra on the average $400,000 mortgage balance.
“That does not equate to a housing collapse. That is not blood in the streets... A quarter-, half-, even a three-quarter point rise in interest rates would have any significant impact on the housing market. In fact, it might rush more people into the market, as they think ‘Oh no, rates are going up, we need to get in now.’”
However, Woodhouse was quick to point out that he doesn’t think that interest rates will go up any time soon. He said that considering the federal government is pumping $23 billion into the economy, it wouldn’t make any sense to also increase interest rates, which would slow economic growth.
“They have one foot down hard on the gas pedal to rev up the economy, so to have another branch of the government, the Bank of Canada, raising interest rates – that’s like the other foot being put on the brake pedal.”