REALTORS® serving Calgary and area

May 20, 2015 | Nolan Matthias

Underestimating the power of low rates


Dream home might be cheaper now

Even though the real estate market is hotter than anyone expected it would be back in January, many buyers are missing out by believing they  can "lowball" sellers and try to steal a property.

Unfortunately, most under-handed offers are still being laughed at as sellers are aware the sky is not falling. As a result, some buyers are deciding to wait for the market to dip before they purchase.

The downside for would-be buyers, though, is they are missing out on the opportunity to borrow money for cheaper and for a longer period of time. Last week, international bond market yields went bananas, increasing without any clear explanation. When bond yields increase like they did last week, that usually means higher fixed rates will follow.

If the bond market doesn't settle itself, the days of borrowing at 2.69 per cent on a five-year fixed mortgage could be coming to an end.

Higher rates mean the cost of borrowing could end up making a home bought at a later date for less money more expensive over the life of the mortgage.

Let's say a borrower decides to wait until the fall to purchase a house because they think they will get a better deal. Let's also assume the market does the opposite of what most economists are predicting and drops 10 per cent.

With this scenario, the buyer gets what he or she thinks is a steal and pays $360,000 for her new home in the fall rather than $400,000 today.

So the buyer saved $40,000, right?

However, if interest rates increased by just one per cent between now and when he or she purchases, that house actually ends up costing an additional $56,000 in interest over the life of the mortgage.

So the buyer actually ends up paying $16,000 more for the property than if he or she had bought sooner and paid a higher price but a lower interest rate.

Interest rates work in funny ways, and need to be factored into the assessment of a property's purchase price. About the time property values start to come down, if they do, is the same time interest rates will start rising, wiping out any potential savings.

Furthermore, a one per cent increase in interest rates reduces the amount a potential borrower will qualify for by 10 per cent. In the event property values don't decrease, one might find themselves being forced to purchase a home that isn't quite as dreamy as originally imagined.

Nolan Matthias holds a bachelor of arts in Economics, is the co-founder of Mortgage360 and the author of The Mortgaged Millionaire. Call Nolan at 403-615-6132 with your questions or to set up an appointment with an Accredited Mortgage Professional (AMP).

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