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You found that perfect house or at the very least the house that you want to make a home. The real estate market has bounced back from the downturn and interest rates are at near historical lows. You're pre-approved for a home loan. Sounds like the perfect time to buy that house, right?
Maybe not.
Death and Taxes and Rising Interest Rates
You know that old saying about death and taxes being the only things certain in life? Well, at this point you can add rising interest rates to the list. Financial industry experts have unequivocally stated that interest rates will rise in the next couple of years. While it's impossible to predict exactly when rates will increase, the general feeling is that rates will start to go up in 2010.
Recently three of Canada's biggest banks cut posted rates for fixed-rate mortgages by up to 0.25 per cent. However, lenders agree that rates are nearing the bottom and will being to rise. With the Bank of Canada's key lending rate sitting at a record low of 0.25 per cent since last spring it is certain that rates can only go one way - up. While the Bank of Canada is attempting to maintain that rate until June 2010, there are already signs that if adjustments are made to the rate that it could be more abrupt than Canadians have seen in the past.
What Does This Mean For Homeowners?
There is growing concern that those financing property now at incredibly low rates will not be able to afford their mortgages when rates rebound. This is compounded by the current trend of 35 year mortgages and 5% down payments.
For example, a $250,000 mortgage with a period of 35 years is only $892 per month at 2.5%, but at 5.5% the payment turns into $1,332. That's a difference of $440 a month. With the costs associated with running a house increasing - including electricity, natural gas and water - a large increase in monthly mortgages payments could mean that homeowners will no longer be able to hold on to their homes.
How to Stay Ahead of Interest Rate Increases
The general wisdom, whether you have a variable or fixed rate mortgage, is to pay down as much of your principal as you can now while rates are low, which should cushion some the blow when rates inevitably rise. The more principal that you pay down the smaller your payments and the faster you pay off your mortgage. You'll also save tens of thousands of dollars in interest.
If you have a fixed-rate mortgage, start making more frequent payments, such as biweekly instead of monthly payments. While those with a variable-rate home equity loan should keep a close eye on interest rates and lock in when they feel that they've reached the limit of their comfort zone.
