Are you in for a Shock?
Are you in for a shock?
By Jason Scott
TMG The Mortgage Group
The ultra-low mortgage interest rates homeowners are currently enjoying are anything but normal.
Rates won’t be this low forever and that means there’s a huge problem lurking ahead for most homeowners.
Canadians are enjoying super-low interest rates because foreign investors see Canada’s economy as a safe harbour compared to other countries.
These foreign investors are buying Canadian government bonds and pushing yields down on those bonds. That means lower mortgage interest rates for you and me.
How long this will continue is a very big question. Eventually the world’s major economies will recover, money will flow elsewhere and Canadian bond yields, and consequently mortgage rates, will increase.
That will create huge problems for thousands of homeowners who’ve stretched to buy a home at super low rates.
Most people take a five-year fixed rate mortgage. When the five-year term is up, the mortgage will renew into a new higher rate.
Let’s say a couple buys a $500,000 home and makes a 5 percent down payment. Their starting mortgage balance is $488,062.50 (including $13,062.50 in mortgage default insurance.) Their monthly mortgage payment is $2337.36 based on a five-year rate of 3.09 per cent and a 25-year amortization.
Fast-forward five years.
Their mortgage balance at renewal is $417,888. That’s assuming they’ve made no extra payments and is the case for the vast majority of people.
The mortgage is renewing to 5.5 per cent (which is where five-year rates roughly were before the financial crisis). Their payments will increase by $528 per month overnight!
That’s $6336 per year in after tax dollars! The family income is unlikely to increase by that much in five years and this couple will be scrambling to come up with the extra money.