The impact of another interest rate increase
But first . . .
“Do you remember where you were when ____?” (You fill it in.)
Sunday was one of those moments for many Canadians.
Now I’m not a huge golf fan—I mostly use it for putting myself to sleep on a Sunday afternoon. But the developing story line for this Canadian Open Golf championship had me and many Canadians glued to our TVs.
You see, no Canadian had won our national championship since 1954. But Saturday, Abbotsford’s Nick Taylor had shot a course record 63 to jump within two shots of the lead. Fellow Canadians Corey Conners and Adam Hadwin (also Abbotsford) were also in the hunt.
When I turned on the TV, Taylor was tied for the lead, but a mitt-full of others were either tied or within a shot or two.
After getting the outright lead, he fell back to a stroke behind, then tied it again with a huge birdie putt on the 17th hole, then another great birdie on the 18th to hold a 1-stroke lead heading into the clubhouse.
But 6 or 8 golfers were still on the course, and they were all close. Canada held its collective breath. In the end, Englishman Tommy Fleetwood also carded a 17-under score. A playoff was in store.
They matched stroke for stroke through three playoff holes. Then, on the fourth, Fleetwood’s third shot had him within range for a makeable birdie putt. Taylor sat on the green, 72 ft. from the pin, as he stepped up for his third shot, hoping to get close enough to sink his own birdie putt.
He didn’t need it. He sank that 72-foot putt. And Canada went wild!
Congratulations to Taylor, who broke the 69-year drought. That 72-ft. putt will be the most celebrated shot in Canadian golf history!
And congrats to Hadwin, too, who finished tied for 12th, Abbotsford buddies being the top two Canadians.
What the interest rate increase means
We all thought interest rates had peaked with the January increase. But the Bank of Canada surprised us last week with another .25% increase.
An increase in interest rates means paying more for your monthly mortgage payment. That may give one pause to buy, as they assess whether they can afford that. To stay within one’s own comfort level, it may mean limiting oneself to a smaller mortgage; hence, a lower-valued property.
But the ultimate restriction is the lenders’ call, and that’s dictated by federal policy (through CMHC). You simply are restricted from paying more than a fixed percentage of your gross monthly income for housing (Gross Debt Service), whether or not you think you can afford it. Gross Debt Service means the principal and interest payments on your mortgage, your property taxes, and an amount for “heat,” usually $100. For strata properties, they’ll also add half your strata fee.
Calculating all those figures, we’ve arrived at a quick rule-of-thumb maximum property value calculation of “X” times your gross annual income. It’s not exact, but close; we’ll never know the exact amount until you apply for that mortgage.
Before the January increase, we’d use a value of 4 times your gross annual income to calculate that maximum property value for a 90% mortgage.
That increase probably should have pushed our rule-of-thumb figure down a smidge. But the lenders all anticipated that rates would come back down a little within a year or two, as indicated by their longer-term rates being less than their short-term rates.
We felt fairly safe sticking with the 4X rule of thumb.
The latest increase changes things. The increased monthly payment means your gross income needs to be higher to qualify for the same property value. But, also, we can no longer take the risk that rates will be much lower than they are today after the end of the rent-2-own term.
I’ve done the math. Unfortunately, we now have to lower our rule-of-thumb maximum property to 3.75 times your gross annual income. To get a $350,000 condo in the Fraser Value, you’ll need a (combined) income of over $93,000. A $500,000 single-family home up-country (say Logan Lake) would require an income of about $133,000.
It doesn’t mean you should despair about getting into your own home. Everyone just needs to lower their expectations a little about the kind of home they’ll accept.
And, with rental rates also continuing to rise, the attraction of rent 2 own is not diminished.
If interest rates do come down over the term of the rent 2 own, then we’ll all be happy with the lower payments for the mortgage you get on closing out the deal.