Fewer First-Time Homebuyers
It’s no secret that the Canadian real estate market is cooling. National sales were down 0.8 per cent in October from September, which shouldn’t come as a shock. With the fourth round of mortgage rules introduced this past summer, the minimum carrying costs of a home has become increasingly more expensive. If you’re a homeowner with a high-ratio mortgage (less than a 20 per cent down payment), you’re limited to a maximum amortization of 25 years (down from 30 years). If you’re applying for a mortgage today, your monthly mortgage payments will be higher, resulting in qualifying for a smaller loan amount.
For example, with a mortgage of $240,000 at an interest rate of 2.99%, your monthly mortgage payment would be $1,008 with a 30-year amortization. But your monthly payment rises to $1,135 with a 25-year amortization – that’s $127 more each month or $1,524 more per year. The new mortgage rules have hit first-time homebuyers the hardest. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 17 per cent of CMHC-insured mortgages covered in 2010 would no longer qualify today. First-time homebuyers looking to get into the market should save a bigger down payment or look at less costly options like a condo or a modest home in the suburbs.
Homeowners Want Fixed vs. Variable
As the spread between fixed rated and variable rate mortgages narrows, a recent report released by the Canadian Association of Accredited Mortgage Professionals (CAAMP) suggests most homeowners are going with the stability of the 5-year fixed rate mortgage over a variable rate. According to the report, 79 per cent of respondents opted for fixed rate, 10 per cent variable, and 11 per cent a combination. This is in stark contact from previous years, where about 66 per cent of mortgages were fixed rate, while 33 per cent were variable rate.
However, it’s not really surprising that more homeowners are going with fixed rate mortgages. Back in 2010, when the spread between fixed rate and variable rate averaged 1.7 per cent, it made sense to consider a variable rate mortgage. Today, with a negligible spread of only 0.25 per cent between the 5-year fixed rate mortgage and variable rate mortgages, it’s hard to see the benefit of a variable rate mortgage when one 25 basis point increase in the prime rate would eliminate any savings in interest.
With the likelihood of interest rates rising in 2013, leading to an increase in prime rate, it probably makes sense to go with the stability of a 5-year fixed rate mortgage if a rate increase would have an adverse effect on your family budget. However, the facts don’t lie: variable rate mortgages have saved homeowners interest 9 times out of 10, in the last 25 years. Variable rate mortgages are also called adjustable rate for a good reason – if you think interest rates are going to remain low during the next five years, a variable rate mortgage may be the way to go. Just be sure to “stress test” your budget in case a rate hike does happen in the not-so-distant future.