There is never a dull moment in the Canadian mortgage landscape with new rules introduced by the Minister of Finance and OSFI, Office of Superintendent of Financial Institutions. I want to state upfront that I support these changes with the exception of reducing secured lines of credit (HELOCs) from 80% to 65% of home values. Canada's housing market has been very hot since the credit crunch of late 2008 and the house prices to income ratio gap has grown significantly due to stimulus low mortgage rates. I want to clarify what families will be facing in 2016, 2017 and beyond. Today's 5 year fixed rates are in the low 3's (3.09%-3.19%) which are fantastic. However, the extended period of low interest rates will be followed by periods of high interest rates due to the following:
- Focus will turn from stimulus in the global economy to combating inflation due to excessive stimulus (money printing and quantitative easing) since 2008
- Cost of borrowing will increase due the European credit crisis which will only intensify as Italy & Spain (3rd & 4th largest economies in Europe) deal with their debt issues. As you recall, in late 2008 when Lehman Brothers collapsed, money (capital) disappeared from the market, creating a supply issue and variable mortgages went from primes less 0.75% to prime plus 1% in a short period of time
I want to share the following numbers to help you see where I am going:
Family household income (pre-tax): $100,000 Income tax bracket: 45% Mortgage amount: $400,000 Interest rate: 3.09% Mortgage amortization: 30 years Monthly payment: $1912 Renewal Rate in 2017: 5.5% (an increase of 2-2.5% over 5 years is very reasonable based on historical data and the above stated issues) Mortgage payment at renewal: $2103 (increase of $416 per month)
Some would assume taking on an additional $416 per month in 5 years is doable. Let's dissect a little further:
In order to absorb $416 of additional mortgage payment, the family's pre-tax income has to increase by $9,000. That might sound reasonable , however, it's equivalent to getting 2.5% raise every year for the next 5 years. The economy is not in the greatest condition: not many companies are hiring, some are cutting back and the reality is keeping a job nowadays is great news. Furthermore, the increased cost of living (property taxes as municipalities deal with their debt and deficit issues, gasoline which affects goods prices, higher hydro rates....) will eat away into a family's affordability. I didn't mention that children cost more as they grow up!
This blog post is a reality check. We have been drunk for too long on cheap money. Plan for the long term and understand how future events should play into your decisions today. This is a golden opportunity to consider long term mortgages such as a 10 year fixed.
To get more information please visit: www.10YearFixedMortgages.com
Whether you agree or disagree with me, I would love to hear from you.