The Bank of Canada, as predicted announced that they are going to raise interest rates from .5% to .75%. This is the first time in seven years that rates have been raised and it is happening in an effort to fight inflation. What does this mean to homeowners and potential buyers in the Markham real estate market?
If you are a homeowner
If you have a mortgage the rise in interest rates will inevitably affect you, but it will depend on if you are have a fixed or a variable-rate mortgage. Those with a fixed rate won’t see a change in their payments on interest until it is time to renew. Interestingly enough, some may even see lower payments take hold when they renew, depending on when they locked in to their fixed rate mortgage and what the rate was. Those with variable rate mortgages and home equity line of credits will see interest rates rise immediately, which means that more of your regular payment will go towards interest and less towards principal. There is a very handy tool on the Global News website that will tell you how much more your payment will be once the rates are increased and what they could be if rates are increased even further.
If you are a potential buyer
Increasing interest rates don’t mean that you’ll pay a larger payment on your new mortgage, but instead that you will qualify for a smaller total purchase price. This is because when you get approved for a mortgage, you only qualify for total housing cost (also known as gross debt service). This means that only 35% of your total income can go towards housing, which includes principal, interest, taxes, heat and 50% of condo fees if applicable. If interest rates go up, this means that the amount you can pay on principal goes down and your total approved amount will also go down.
What does this mean for the housing market?
Some believe that the rise in interest rates is another further tactic to cool the housing market, but home prices are still rising and expected to keep doing so. In the GTA, home prices jumped a whopping 24% from the period of April to June compared to the same three months in 2016.
How to protect yourself from rising interest rates
Many homeowners might think now is a good time to renegotiate their mortgage and get a fixed rate, but jumping on that may not be beneficial. The best solution is to pay down your debts – your home equity line of credit first and your mortgage second. Many homeowners are only making interest payments on their line of credit, waiting (intentionally or not) until they sell their house to pay it off. With the rates rising, your payments will be higher so you are best to pay it off as soon as you can.
If you are thinking of buying a home, buying now is my best advice. Interest rates will go up and as you can see, home prices are going up as well. If you need help finding the right Markham house, my door is always open.
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