After the financial crisis of 2009, we have been enjoying the benefit of low interest rates. It has been such a long time since we had an interest rate increase, that we have forgotten what is like to be stuck with a five-year closed term high interest rate mortgage.
I remember my last high interest rate mortgage, a five-year term at 6.10 per cent closed mortgage. It was painful to see that the biggest portion of my mortgage payment was to pay off the interest, and after five years of monthly payments the principal amount was slightly lower than the original mortgage amount. However, 6.10 per cent was a good rate compared to the 13 per cent interest rate I was paying when I bought my first house way back in 1986.
We have been enjoying the benefit of the lowest interest rates for the last eight years and you may think that low interest rates are going to stay low forever. Perish that thought! At some point in time, in the not so distant future, interest rates will start to go up and that time has now arrived as announced by the Bank of Canada on Wednesday.
Do you realize that since 1935 (82 years ago) we never had interest rates as low as they are right now? I will say it again, never in Canadian history we had interest rates as low as they are today. Currently you can get a five-year term mortgage rate for 2.50 per cent or less. In fact, I was talking to a mortgage broker recently and she told me that Scotia Bank, the bank that she represents, is offering their clients a 2.29 per cent mortgage rate on a four-year term. That is the lowest rate that I seen in the industry.
If you consider that the 15-year mortgage rate average is 7.4 per cent, you could say that we are in a mortgage rate heaven. However, all good things must come to an end and, interest rates in due time will start to move higher near the 15-year average.
There is a group of people that think that interest rates will stay as they are forever. I don't see any evidence to support that theory, quite the opposite, I have seen enough evidence that interest rates will move higher in the coming months and years. One major piece of evidence was produced by the stress test that the federal government introduced last year. Although the interest rates did not change, all financial institutions are required to qualify their clients at a higher rate. Why would the federal government do that?
My take is that they are anticipating a mortgage rate increase over the next few years, and that they want to avoid a financial crisis similar to the one in the USA in 2009. Although interest rates have not changed, in five years time, the interest rates may be around the level of the stress test qualifying rate of 4.64 per cent. By enforcing such measures, the federal government will ensure that new home buyers will not default when it comes time to renew their mortgages. Having said that, a 4.64 per cent stress test qualifying rate may give you an indication of where the federal government anticipates the mortgage rates will be in five years.
Is that too much? I don't think so. Consider for a moment that a 4.64 per cent stress test rate is much lower than the 7.4 per cent, 15-year mortgage rate average. Therefore, if you are thinking of buying a home in the next few months or refinancing your existing home, don't wait until the interest rates go up, go and lock in the lower rate as soon as you can.
Joaquin Benitez is a licensed real estate agent and author of the book, The Foreclosure Phenomenon: How to Defend Your Home from an Impending Foreclosure, available at Amazon.com and chapters.indigo.ca
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