On April 10th, the Bank of Canada announced that they were holding the overnight interest rate at 5%. Like many Canadians, you may be waiting for interest rates to drop before making your move in the housing market. If you’ve been following the real estate market long enough, you have almost certainly heard the phrase ”Marry the house, date the rate”. At its core, this piece of advice encourages potential home buyers to prioritize finding their dream home over fixating on getting the lowest possible interest rate on their mortgage. But does this strategy make sense?
Historically, when interest rates are high, home prices tend to be lower due to the decrease of buyers in the market. So, while it will cost you more to borrow with a high interest rate, the overall cost of home ownership is lower and, as rates come down, you have the option to refinance or renew at a lower rate. Let’s take a look at an example:
If a home is priced at $800,000 and you put 20% down, you are left with a mortgage of $680,000. When interest rates were low at 2.5% your monthly mortgage payment would have been around $2,867. After a 5 year term, the remaining mortgage would be about $541,683.
As rates increased, the average home price dropped by approximately 15%, so that same home would now be selling for $680,000 and you would require a mortgage of $544,000. At the current higher rate of 5.04%, your monthly mortgage payment would be $3,176 and you would owe $481,783 after the 5 year term.
At the end of the term, you would end up paying $18,540 more in monthly payment at the higher rate, but you would have $59,900 less owing on your mortgage overall which works out to a savings of $41,360.
This strategy is not without its risks. First of all, mortgage rates may not come down as expected. If you can’t comfortably afford mortgage payments at the higher interest rate, then this might not be a sensible option for you. Second, if you don’t plan to stay in the home long term, the costs associated with refinancing may make this strategy less affordable. Of course, you should always seek the advice of a professional mortgage broker as they will be able to help determine what strategy will work best for you. If you would like to be put in touch with one of my trusted mortgage broker partners, I would be happy to connect you!
- Tracy