Beware the impact of rising interest rates

Friday, August 26th, 2005

Ashley Ford

CREDIT: Ric Ernst, The Province Despite having the highest real-estate prices in the country, Lower Mainland buyers continue to flock to the condo market

Beware the impact of rising interest rates, potential homebuyers are being warned.

With rate increases now a virtual certainty, Lower Mainland mortgage experts and realtors are urging would-be buyers to be very deliberate in nailing down their financial arrangements.

Rein Webber, a broker with The Mortgage Group in Vancouver, said in an interview yesterday the anticipated rate increases will probably not slow down buying demand here.

But borrowers should carefully study the full financial implications of their obligations, he said.

He was commenting on a report from Royal LePage Real Estate Services showing that condominium purchases by first-time buyers are forecast to double in the next three years.

The report also said that many new homebuyers could benefit from doing a little more real-estate homework as they take the ownership plunge.

There are clear signs buyers don’t really understand the implications of even a small increase in interest rates.

Royal asked new homebuyers: “If you have a $150,000 mortgage and the interest rate increases from five per cent to six per cent, approximately how much more would you pay over the next 10 years?”

Only 18 per cent answered correctly — $10,000 to $15,000 — while about 40 per cent said they didn’t know the answer.

Webber said mortgage rates are still in the favour of buyers, but he cautions about over-committing one’s financial resources, especially high-ratio borrowers.

Webber said that variable mortgage options continue to be very popular with the lowest rate around 3.4 per cent compared to a five-year term of 4.4 per cent.

“The variable option is more popular and there is protection for consumers in that they can lock in at any time. But not all lock-in provisions are the same and borrowers should read the lock-in provisions carefully,” he said.

“My advice is that if you can afford to pay the five-year payment rates, even if you have taken a variable rate, do so as it provides a psychological buffer and you are not going to be impacted by any sudden rate rise.

“There is the added bonus that you are paying down the principal more quickly,” he said,

Despite having the highest real-estate prices in the country, Lower Mainland buyers continue to flock to the condo market with B.C. having the highest numbers of first-time buyers in Canada over the past five years

“Escalating prices have made condominiums virtually the only affordable option for first-time buyers,” said Bill Binnie, president of Royal LePage Northshore Vancouver.

Vancouver can be a difficult market to navigate for first-timer buyers due to the shortage of inventory, high level of demand and frequency of multiple offer situations.”

It’s not always only a question of affordability either. Binnie says buyers must carefully consider their future home needs.

“We have seen a number of first-time buyers re-enter the real-estate market earlier than they expected because they had not anticipated rapid changes occurring in their lives.”

The savings they may have made on the initial purchase can be quickly swallowed up by moving costs, taxes and legal fees that come into play when changing a house, he said.


A mortgage of $100,000 on a 25-year amortization can change as interest rates rise:

variable at 3.4 per cent = $493

a five-year rate at 4.4 per cent = $548

a five-per-cent rate = $582

a six-per-cent rate = $641

a seven-per-cent rate = $702

© The Vancouver Province 2005

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