I had a very interesting conversation with a home buyer at an Open House recently. They are excited to be out looking; they are pre-approved with a mortgage rate locked for 90 days (until the end of March); and they are curious if house prices will continue to decline.

So we began to talk about their timing, specifically as it relates to the recent announcement by all of the major banks! 

This is a really, really big deal and you will see why shortly.

Back to our young couple. I always believe it best to ask lots of questions. Asking questions brings clarity and allows for self-discovery of the facts rather than being told or lectured. We all prefer when it is our own idea after all! 

My first question was to inquire if they are aware that most homes can take about 60 days on average to close - some more and some less. So based on their rate hold, did they have too much more time to kick some tires and wait for prices to drop? No worries, according to this young couple. They have until the end of March to find a home and get an accepted offer.

Yikes was my silent response. Then on to the next question - Are you sure the fine print from the lender says that you keep this amazing rate as long as you have bought a home? Or you keep this amazing rate only if you actually close on the new home ahead of the deadline? Well, this potential reality caught them both off guard. If in fact they had to close on a home before the end of March they suddenly recognized that they cannot wait much longer to buy. 

So I did gently suggest they speak to their lender and double check as this could be a costly mistake.

Not necessarily was their response. What if house prices go down with the new Mortgage Stress Test? 

"And what if rates go up as prices go down?", I asked. 

"That's ok", they replied. "The house is cheaper so we are getting a better deal.

"Do you want to explore this a bit?", I asked. "Let's look at the total interest paid over time and decide if it really is worth waiting."


And here is the example I outlined to the young couple at the Open House...

Assume an $800,000 home purchase with a 20% down payment; a 5 year fixed term; and a 25 year amortization. (And for this example, I will assume what most are suggesting right now - that rates will likely rise 50 - 75 basis points in 2018.)

Mortgage Rate
Total Interest Paid
Difference Paid($)
Necessary House Price Drop(%) to Equalize
3%
$268,631
$0
0
3.25%
$293,439
$24,808
-3%
3.5%
$318,599
$49,968
-6%
3.75%
$344,107
$75,476
-9.4%
4.0%
$369,959
$101,328
-12.7%

(Data as found on ratehub.ca. - that's where I looked with our young Open House couple after all!)


So, let's go back to our buyer above! Assume for a moment that they do not purchase a home before the deadline on their rate hold. We already know that the rates have gone up by 15 basis points at the 6 major banks. Further,  it is very safe to assume the Bank of Canada will raise its rate by a minimum of 25 basis points (and likely this week with the next Bank announcement on January 17). All lenders will likely follow suit and the best rates will increase by an additional 0.25% minimum; and don't be a bit surprised if the 6 major banks look to the Bank of Canada announcement as further permission for them to raise rates again - a second increase in less than a week!

(And this just in - Bank of Canada raises to 1.25%. And as suggested in the above paragraph, several banks that had already raised their rates in the past week just raised them again by another 0.25%. Saw that one coming!)

Looking at the chart above, with a 0.25% raise in rates, the same $800,000 purchase will have to drop in price by 3% or $24,808. Alternatively, if the prices don't drop AND the buyer does wait, the reality is the home will now cost more over the life of the mortgage. 

So, what is the cost of waiting? It could become very costly to assume that prices will fall in 2018. If, in fact, we see the rate hikes many are suggesting this year, the cost of waiting could be as high as $75,476 (based on our example above). 

We always counsel our clients that we only know the market we are in right now. Rates are absolutely going up. Prices may not go down. And if they do, prices may not decline in proportion to the rising cost of borrowing. Are you really prepared to gamble that the house you are looking at today will drop in price by about 10% this year?

Everyone's goals and situations are unique and as such deserve a proper consultation to ensure you are making the very best decisions in our current market. We are here to help!