Home buyers should be more aware of the cost of interest rate hikes

Friday, August 26th, 2005

Fiona Anderson

First-time home buyers are unaware of what increasing interest rates could cost them, according to a survey carried out by Royal LePage Real Estate Services and Scotiabank.

The survey asked 711 first-time buyers how much more they would have to pay if interest rates went up one per cent. Thirty-nine per cent had no idea.

Only 18 per cent answered correctly that if mortgage rates on a $150,000 mortgage increased from five to six per cent, total payments over 10 years would increase by between $10,000 and $15,000.

“First-time buyers are well aware of the possibility of interest-rate increases and factor them into their decision to buy, but their awareness on how an interest-rate increase could affect their future finances is surprisingly low,” said Phil Soper, head of Royal LePage.

“Nonetheless, with interest rates expected to drift modestly higher over the coming year, it’s important that first-time home buyers have a strategy in place to properly structure their borrowing,” Soper added.

The Bank of Canada is expected to start raising interest rates on Sept. 7 and to continue raising them over the coming year by anywhere from one to 1.5 percentage points.

But the most critical consideration for first-time buyers is not the amount of interest paid but rather the monthly payment, said David Chung, manager of residential mortgages at TD Canada Trust.

Even in a variable rate mortgage, monthly payments don’t change unless the rates increase by a certain amount, Chung said. So with the current variable rate of 3.45 per cent a mortgage of $100,000 translates into a payment of $496 per month. If the rate goes up by a point, monthly payments stay the same but about $20 more of the payment goes to interest instead of principal.

“To most people that’s not a big deal because in the first five years the priority is not to pay off the mortgage,” Chung said.

The priority is surviving the five years until it’s time to renew the mortgage. And at that time, most first-time buyers are much better off financially, with higher paying jobs and sometimes a spouse to help pay the expenses.

It appears any thought of rising interest rates is not stopping young buyers from entering the Vancouver housing market.

In a report also released Thursday, Royal LePage found that low interest rates continue to make home ownership possible in Vancouver, Canada‘s most expensive city from a home-buying point of view. However, escalating prices means a condominium is often the only affordable option for first-time buyers.

Downtown Vancouver and Yaletown continue to be popular areas, where entry-level buyers, spend $200,000 to $220,000 for a one-bedroom condominium.


Royal LePage Real Estate Services and Scotia Bank asked 711 first-time buyers this multiple-choice question: If you have a $150,000 mortgage and the interest rate increases from 5% to 6%, how much more would you pay over the next 10 years? Only 18% answered correctly:

39% – Didn’t know

17% – $5,000 -$10,000

18% – $10,000-$15,000 (correct)

13% – $15,000-$20,000

4% – $20,000-$25,000

2% – $25,000-$30,000

2% – $30,000-$35,000

3% – $35,000-$40,000

1% – Refused

© The Vancouver Sun 2005

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