Here’s how rising interest rates affect buyers, sellers, and homeowners.
The Bank of Canada has recently raised its prime interest rate from 0.25% to 0.5%. This is big news, so today I want to go over how this could affect buyers and sellers alike.
If you currently own a home and you have a fixed-rate mortgage, don’t worry; this doesn’t affect you at all. My only advice is that if you want to refinance early and pull equity out, you may want to do it sooner rather than later. If you’re a homeowner with a variable interest rate mortgage, your interest rates probably just went up. **Should you lock in a fixed rate or hold true? **
Right now, fixed-rate mortgages are at around 3%, while variable-rate mortgages are at 1.7% for the first five years or so. That’s a difference of 1.3%. For the variable-rate mortgage to break even with the fixed-rate, rates will need to increase another five times in the next two years. Then, they would need to increase another five times in the following two years for you to save any money by switching. That was a lot of math; what does it mean for you? The bottom line is that **if you have a variable-rate mortgage, I believe you should hold on to it. **
For homebuyers, the stress-test rate is still 5.25%, so your affordability hasn’t been affected. I would also caution against panicking and switching to a fixed-rate mortgage for the same reasons I laid out above. Plus variable-rate mortgages allow you to stay flexible.
By flexible, I mean that if you decide to sell your home within the first five years of buying, you’ll only have to pay a penalty equal to three months of interest on your mortgage balance. If you have a five-year fixed-rate mortgage, the penalty will be much higher.
If you’re thinking of selling, how does this affect you? Nothing has changed just yet, but rising rates could be a sign of things to come. If rates continue to rise, affordability could be affected, and demand could decrease. This means you might get a worse deal for your home. I recommend selling soon so that you can take advantage of our fantastic market.
If you have any questions about today’s video, please call or email me. I am always willing to help!