# Will mortgage rate going up soon and home prices?



## CuriousReader (Apr 3, 2009)

Hi,

I really want to buy a condo for myself, I have some money for down payment, but I prefer to have bigger downpayment. Question is, should I rush to take advantage of currently low interest rate and (may be) lower prices?

Or is it better to wait another year when I have more money for downpayment, but risking_ the mortgage rate going up and real estate recovery such that prices go up?
_

Main question would be: how likely is it that the market becomes "worse" for buyers in the next 1-2 years?


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## stephenheath (Apr 3, 2009)

You'd probably need to look at the numbers and see for yourself how significant your options are... for example, if you are able to save enough for the downpayment to not need CMHC insurance, that's a huge difference... if you're going from a 10 to 12% downpayment, not really that big a deal.

Realistically though, if interest rates went up significantly, that would generally mean that there are fewer buyers, or they are willing to pay less, for houses, which should make it more of a buyer's market than the current very low interest rates are.


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## Rickson9 (Apr 9, 2009)

Unfortunately nobody knows.


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## Potato (Apr 3, 2009)

Rickson9 said:


> Unfortunately nobody knows.



And I don't _know_, but it's not going to stop me from _guessing_ 




CuriousReader said:


> Question is, should I rush to take advantage of currently low interest rate and (may be) lower prices?
> 
> Or is it better to wait another year when I have more money for downpayment, but risking the mortgage rate going up and real estate recovery such that prices go up?
> 
> Main question would be: how likely is it that the market becomes "worse" for buyers in the next 1-2 years?



You haven't filled out your location info, and real estate is local, but if you're looking at a condo that tells me you're probably in a large city with condos, like Vancouver or Toronto. Since condos are often offered up as rentals, I'd start by looking to see if you can find out what it would cost to rent the unit you're looking for vs the cost to own it (try to get as close to an apples-to-apples comparison as you can, there are many sites around that can help you with the calculation). I suspect, especially for Toronto and Vancouver, that you'll find it's cheaper to rent than buy a condo, in which case there's no need to hurry!

If rates do go up, then prices should come down, which in the long run may be better for you (a high rate only lasts as long as the rate is high -- perhaps a few years -- but an inflated purchase price sticks with you for the life of the mortgage).

As you save up for that downpayment don't forget to also save enough so that you also have a healthy emergency fund: owning carries a lot more risks than renting does. You don't want to use your last bit of savings towards the downpayment just to find you need to repair something a month into owning.


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## Bullseye (Apr 5, 2009)

It seems illogical at first, but for buyers, higher rates are a GOOD thing! Higher rates drive down prices, usually by a much larger amount than the extra interest you'll pay on your mortgage. 

In my opinion, ultra low rates right now are the only thing preventing a large housing price correction. My expectation is that as the economy recovers, and rates start to rise, housing prices will start dropping more rapidly. I certainly wouldn't be in any hurry to buy anytime soon, if you're hoping to time an entry into the market.


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## Rickson9 (Apr 9, 2009)

Bullseye said:


> It seems illogical at first, but for buyers, higher rates are a GOOD thing! Higher rates drive down prices, usually by a much larger amount than the extra interest you'll pay on your mortgage.


I agree.


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## Ben (Apr 3, 2009)

Bullseye said:


> In my opinion, ultra low rates right now are the only thing preventing a large housing price correction. My expectation is that as the economy recovers, and rates start to rise, housing prices will start dropping more rapidly. I certainly wouldn't be in any hurry to buy anytime soon, if you're hoping to time an entry into the market.


I agree with most of this. Real estate, in several areas of Canada, is a one-legged man with interest rates as his crutch. I don't see a rapid decrease necessarily, but flatlining or slow and steady decrease is more likely than a slow increase.

It does matter quite a lot on where Curious Reader is. Some regions are likely to remain strong based on local factors.

And myself, if I were on the real estate sidelines right now, I would not be asking the coach to put me in the game. There are a couple of unpredictable players on the field. But, if I had a good set of safety gear on (solid downpayment, emergency fund, job security, no plans to move for at least 5 years) then I might be tempted.


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## Mockingbird (Apr 29, 2009)

With rising bond yield, looks like fixed mortgage rates are going up tomorrow.


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## canadianbanks (Jun 5, 2009)

For me buying real estate when interest rates are at the lowest point they can be is a losing proposition. Higher interest rates always mean lower housing prices, and this is what happens next. If you have significant down payment when house prices crash, you will have a distinct advantage over the debt addicted crowd, because you will have to borrow less and pay lower price for the house at the same time. Meanwhile it's likely that everybody that bought in the last 3 years with less than 20% down will be underwater. 

Just my 2 cents.




CuriousReader said:


> Hi,
> 
> I really want to buy a condo for myself, I have some money for down payment, but I prefer to have bigger downpayment. Question is, should I rush to take advantage of currently low interest rate and (may be) lower prices?
> 
> ...


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## FinancialJungle (Apr 22, 2009)

I totally agree with a number of posts here. I much rather shoulder small mortgage at a higher rate over a big mortgage at a lower rate. Bond yields are rising, so a RE correction is pretty much imminent. The biggest casualities will be the ones holding an onerous mortgage at renewal time. 

Even if RE prices were to stay stagnant for years, with rents being cheaper in many parts of Canada, it literally pays to remain a renter while building up for a downpayment.


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## Ben (Apr 3, 2009)

FinancialJungle said:


> I much rather shoulder small mortgage at a higher rate over a big mortgage at a lower rate.


Absolutely true.


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## Brad911 (Apr 19, 2009)

FinancialJungle said:


> ....I much rather shoulder small mortgage at a higher rate over a big mortgage at a lower rate. Bond yields are rising, so a RE correction is pretty much imminent. The biggest casualities will be the ones holding an onerous mortgage at renewal time....it literally pays to remain a renter while building up for a downpayment.


I don't think any prospective RE owner will miss the boat anytime soon. All you have to do is look at price appreciation of RE values over the past 10 years and the chart looks a lot like that of many stock market corrections and without any sign of slowing down its decline. 20% should be the standard....bottom line. I've said it before and I'll say it again: affordability is skewed in the wrong directly directly because of low interest rates and CMHC insurance for 5% down mortgages (the majority in today's market). Take rates to historical levels and all of a sudden you have a considerable correction and your 5% down is now 10% underwater.

Why am I buying? 20% down, good 5 yr fixed rate and my income is very stable (nursing). Even if my fiancee lost her job I can carry all our monthly expenses plus $500 in savings each month. I am not a believer in two incomes supporting spending in a conservative spending plan. If one income is lost you're DOA or if one of you wants to stay home with the kids part-time you're on too tight of a budget. Everything my partner makes is 100% savings and that's how you achieve financial freedom early in life. Our spending is controlled and we like nice things, but we decided not to buy a house at the maximum range of our affordability because we have no desire to pay it off over 25 years.


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## FinancialJungle (Apr 22, 2009)

Brad911 said:


> 20% down


Hey Brad, will there be any changes to your investment portfolio regarding funding? Registered, non-registered, Smith-Manoeuvre, Homebuyers Plan?

Another follow up question. If you're expecting a pending ~20% correction, wouldn't it make sense to wait until that happens in order to borrow a smaller mortgage? A 20% reduction in price is a 25% reduction in mortgage. e.g. If you borrowed $80k on a $100k home, a 20% correction would mean you could've bought the same home with a $60k mortgage -- an even shorter road to financial freedom. Assuming your local real estate is similar to mine (all-in ownership expenses > rents) you should be able to bulk up the downpayment during the correction. But then, I have a non-traditional view on real estate, where I see houses as commodity. Technically each home is unique, but I'm indifferent about living on the 10th floor or the 12th floor, or the building across the street. And I don't care if I rent or own the same unit. Although homeownership isn't an end goal of mine, for others, I can understand the appeal of being a proud owner. I was a proud owner once, but only if I could hang on to that feeling after the first year ...


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## CanadianCapitalist (Mar 31, 2009)

FinancialJungle said:


> Even if RE prices were to stay stagnant for years, with rents being cheaper in many parts of Canada, it literally pays to remain a renter while building up for a downpayment.


The trouble is home buying isn't strictly a financial decision. If we can afford a home easily, my wife would want one irrespective of whether it makes better sense to rent. Sometimes, you simply wave the white flag and buy the peace on the home front.


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## Brad911 (Apr 19, 2009)

FinancialJungle said:


> Hey Brad, will there be any changes to your investment portfolio regarding funding? Registered, non-registered, Smith-Manoeuvre, Homebuyers Plan?


There weren't any changes; just a re-organization. Basically I went the Smith-Manoeuvre route with my non-registered portfolio (left my RSP untouched) and have approximately a $90k mortgage. My biggest intention was to get as much as I could onto my HELOC to maximize the interest costs for myself. The home itself will be our family home for the next few decades and I'm buying it under current market value (private sale). For me I view my home as a necessity (somewhere to live) but also as part of my networth/investment portfolio. I've trimmed my FI component to just what I have in my RSP (about 25%) since I view a home as just a giant bond you live inside.

My comments on the market dropping are more generic than my individual situation. The timing isn't perfect, but for me its within walking distance to the hospital I work at in a very nice neighbourhood with mature trees, backs onto an elementary school and a lot of approx 12,000 sqft where most lots in the neighbourhood are only half that. I just feel that a lot of home owners who only put down 5% don't understand the considerable risk they take. Just because you can afford the payments now doesn't mean you can in the future or that it's a smart investment.




FinancialJungle said:


> Another follow up question. If you're expecting a pending ~20% correction, wouldn't it make sense to wait until that happens in order to borrow a smaller mortgage?


It would in a normal situation, but if I wait I know I'll only be getting half the house for 20% less than the one I'm buying. If I were looking to climb the property ladder I completely agree that waiting for higher rates is the best option and I know I'm buying before the best possible opportunity. But for me a fixed 5-yr rate at 3.64% kind of negates things when I look at the rate my HELOC is set at too. My interest costs are substantially less (at the moment) and I can pay off a truck load of my debt in the first 5 years if rates stay where they are. I don't expect that, but I'm protected from them to a certain extent and my portfolio currently generates enough income to protect my HELOC up to a 6% interest rate when I consider the tax benefits to the interest at my MTR.

London is a little different than Vancouver too and that's part of my decision. Another important factor is my future wife. She doesn't want an apartment anymore and I can understand that from her perspective as a young woman. She fell in love with this home the first moment she saw it and there really wasn't much of a discussion about waiting for better prices. This was the one she wanted; plain and simple and I've known the home for over 25 years so I generally agreed with her thoughts. When I look at my portfolio, my age and the situation her happiness is worth a lot more than the $30,000 or so I could have saved by waiting for a better price on an inferior home.


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## FinancialJungle (Apr 22, 2009)

Brad911 said:


> ...have approximately a $90k mortgage.


I'm shaking my head while staring at London prices on MLS. Prices in London are unbelivably cheap! They're literally 1/3rd to 1/4th of the prices of Vancouver. It's no wonder some in this forum managed to clear their mortgage debts in 3 years. Wow. Maybe I'm living in the wrong city.

To give you an idea of how much my neighbourhood costs:

http://tinyurl.com/nypgxh


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## Rickson9 (Apr 9, 2009)

FinancialJungle said:


> To give you an idea of how much my neighbourhood costs:http://tinyurl.com/nypgxh


Wow that's crazy!


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## Brad911 (Apr 19, 2009)

FinancialJungle said:


> I'm shaking my head while staring at London prices on MLS. Prices in London are unbelivably cheap! They're literally 1/3rd to 1/4th of the prices of Vancouver....To give you an idea of how much my neighbourhood costs...


The scenery where you are is no comparison vs. London and the climate in the winter is enviable as well. London is possibly more affordable compared to other markets in Canada, but with a strong manufacturing base nearby in St. Thomas and construction at nearly 50% unemployment I don't see where the sustainability for affordable housing is even if prices remain where they currently are. I've shared with peers in the area that I expect a 15% correction in the RE market here simply based on the area job losses and high dependance on dual incomes to support mortgage payments.

Elsewhere in Canada is a different story, but its a direct relationship between growth in real incomes and the RE market that has seriously concerned with how the market is currently situated (as I've said before).


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