One moment you’re coasting on low rates; the next, you’re watching your finances nosedive as borrowing costs soar
The world of mortgages can indeed feel like a financial roller coaster.
There are peaks and valleys
Eventually, however, the ride smooths out. In the last four years, for example, the average Canadian’s paycheque is up 18 per cent, the cost of living (officially) is up 18 per cent, home prices are up 11 per cent, and average mortgage rates are up 275 basis points (bps). Throw all of that in a mortgage blender, and it means an average Canadian with a 20 per cent down payment and no other debt can qualify for a $418,000 home today. That’s near the typical first-time buyer’s price point, and surprisingly, it’s only $4,000 less than they could be approved for four years ago.
There are unexpected twists
There’s lots of anticipation
Should you trust the historical outperformance of variable rates despite the stomach-churning accents and drops? Or should you commit to a locked-in rate for several years? The decision, which will invariably make or cost you thousands, can leave borrowers optimistic and fearful at the same time. And if rates shoot higher, like the 275 bps average increase over the last four years, you could face a renewal payment that’s more than 30 per cent higher. Welcome to the high-stakes game of mortgaging.
There’s a long wait for the drop
Mortgagors all itch for the thrilling plunge of lower rates, but falling rates take time. Barring an economic shock, it could take many months before variable rates get back to something that feels less extortionary. As it stands, the bond market projects that Canada’s benchmark prime rate could fall 200 bps. But those same bond traders imply it could take all the way till December 2025.
Unpredictable duration
You don’t always know how long the ride will last. You might find another home in a few years that requires an even bigger mortgage. In that case, you better hope your financing is portable to that new home, with the ability to economically increase borrowing without penalty. Otherwise, the price of your ‘fun park’ ticket could be thousands more than expected.
In some cases, times get tough, and borrowers consider selling. You can almost always break a mortgage whenever you want, but there are usually penalties. Those can exceed $10,000 on a closed fixed $400,000 mortgage — the kind of thrill many wallets can’t handle.
You’re strapped in
Once you commit to a closed mortgage, it’s like the safety bar coming down on your lap. You’re strapped in for the ride and you aren’t getting out easy, thanks to mortgage penalties. And if you buy at the wrong time, with too small a down payment, and prices then dive, you might not be able to sell for enough to pay off your mortgage. That doesn’t happen very often, but it happened to some folks who bought with five per cent down in 2022.
So, if you’re a fresh-faced home dreamer contemplating your first home loan, mortgages are a fantastic tool to build home equity and retire better off. But they can also be a wild trip if you’re not prepared. The best way to avoid nauseous feelings is to go in with ample backup savings. Odds are, you’ll need to tap them at some point along the ride.
The rates displayed below are updated by the end of each day and are sourced from the Canadian Mortgage Rate Survey produced by MortgageLogic.news. Postmedia and Imaginative. Online Inc., parent of MortgageLogic.news, are compensated by certain mortgage providers when you click on their links in the charts.