We’re just 2 days away from decision day at the Bank of Canada, and of course the big decision that’s to be made on Wednesday of this week is whether or not another hike of the country’s interest rate is in order. There are many insiders who have already stated it is very likely as good as done, and the reasoning being the same as the last increase to the federal interest rate – the inflation that is hurting the economy isn’t being suppressed to the extent we need it to be.
Much has been made of how interest rate hikes have put homeowners in precarious situations, and most specifically with those who have overleveraged themselves to buy a home. The FOMO – fear of missing out – phenomenon has been a very real one with home ownership impetuses for many young people in Canada, and it has been understandable. But unfortunately it is these people who are decidedly ‘house poor’ who stand to be most negatively affected if interest rates go up again.
In the bigger picture this will also always mean that fewer qualified homebuyers exist, and there also may even be qualified ones who are choosing to err on the side of caution when the cost of borrowing money is becoming much, much more expensive these days. That detracts from the ability of a realtor to generate themselves new home buyer clientele, and it is well known that the majority of homeowners will know personally of a realtor they’re likely to work with.
Our online real estate lead generations system here at Real Estate Leads can be a very good way for new realtors to still generate clientele of both types, and it comes highly recommended. But let’s dig deeper into what another raising of the interest rate could mean for new homeowners.
More Debt Servicing
Another increase will mean some homeowners will be unable to finance their mortgage. This is because incomes have not been rising in pace and so increasing amounts of these owners disposable income will have to go towards paying interest on our debt, while making much less progress on paying down the actual mortgage debt itself.
And of course those raises have happened eight times in less than a year, and another one on Wednesday would be the third increase for 2023. If it is the 25 basis points that economists are predicting then the overnight rate would be moving up to 5% and the prime rate to 7.2% .
This would make for the highest rates in approximately 30 years, and they’re going to take quite a bite out of the finances of lot less-stable homeowners in Canada. Those with a variable-rate mortgage will be taking it on the chin the worst, and estimates are that a homeowner who has put 10% down on a house that costs about $729,000 with a 5-year variable rate of 5.80 per cent over 25 years will pay $100 more per month in mortgage payments.
That may not seem like a lot, but for some households it will be problematic and let’s keep in mind these rate hikes seem to be coming fairly regularly now and what’s to suggest that’s not going to continue? Then there are those with a fixed-rate mortgage who will see an increase when their term expires. The ramification that will apply to all is that the rate hikes will have a little bit longer lag in terms of that monetary policy transmission to households.
New Lender Safeguard
But the consensus for current homeowners with a mortgage up for renewal within the next year is that they should seek out rates with a new lender. By doing so owners if rates are raised again they can try breaking their existing mortgage and switching to that new lender before your rate hold expires to lock in the lower rate.
As mentioned, the needs for these rate hikes are explained with the way excess demand in the economy looks to be more persistent than anticipated. Hiking interest rates is done with the aim to cool demand from the markets. This can be derived from both households and businesses, and the accompanying aim will be to balance it with production capacity.
This has the potential to be a worrying time for some homeowners yet again, but it’s an example of how the nature of lending means that people assume risks with borrowing money and that reigning in inflation is something that must be done even if it puts some lenders in increasing jeopardy.
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