February 20, 2007


Blurb: Many potential home buyers look carefully at house prices before they take the plunge. But mortgage rates are just as important.


Home shopping? Don’t ignore mortgage rates


By Peter Diekmeyer • Bankrate.com


During spring, Canadians’ thoughts turn to housing. After the slow months of January and February, real estate activity spikes dramatically between March and May, as buyers line up new digs for Canada’s unofficial “moving day” on July 1rst.


This year, as usual, potential buyers will be looking primarily at house prices, before deciding whether it’s a good time to take the plunge. But according to one expert, mortgage interest costs are just as important, if not more so.


“Mortgage interest is the largest determinant of housing affordability for most new home buyers,” says Mathieu D’Anjou, an economist at Desjardins. “That means in most cases, shoppers need to pay as much attention to the rate they get on their mortgage as they do to how much they pay for their home.”


The interest rate burden

D’Anjou should know. He’s been tracking the cost of housing in Canada. The key elements he includes in his affordability index are interest costs, capital repayment, municipal taxes, heating and public services such as electricity and water. Of these, mortgage interest costs for what he defines as a benchmark Canadian new home buyer can run as high as 85 percent of home ownership expenses.


A quick run of the numbers shows why. The average Canadian house price sold during January in the major markets covered by the Canadian Real Estate Association’s monthly surveys was close to $300,000. That means a typical new homebuyer making a down payment worth 20 percent of the home’s value, would carry a mortgage of about $240,000.


According to Bankrate.ca’s mortgage calculator (http://www.bankrate.com/can/mortgage-calculator.asp), if that homebuyer borrowed at the major Canadian banks’ five-year closed posted rate of 6.65 percent, his monthly payments would work out to $1,629.46. Of that, only $317.52 of the initial payment would go towards paying down the loan, with the balance comprised of interest. As the years pass, the amount devoted toward paying down principal would increase only gradually.


If this typical home buyer borrows at the same interest rate throughout the mortgage, he will pay back fully $488,000 (25 years x 12 payments x $1,629.46), of which more than half will be accounted for by interest payments. Furthermore, interest rates are currently at low levels on a historical basis and many Canadians take out 30 year mortgages. As a result, in many cases the interest burden could be much higher.


The bottom line is that with mortgage rates playing so key a role in home ownership costs, it pays to form an opinion about where they are headed, before you undertake any real estate transaction.


Influences on mortgage rates

According to D’Anjou, the primary influences on mortgage rates differ based on the length of the loan. Short-term mortgage rates are influenced more by the Bank of Canada’s key rate and longer term mortgages tend to be tied more closely to the Government of Canada longer term bonds.


For example during the past three years, the Bank of Canada has raised its key rate by about 2.25 per cent, from 2.0 percent in early 2004, to 4.25 percent early this year. During the same time period, Desjardins’ one year mortgage rates rose by 2.2 percentage points from 4.3 percent to 6.5 percent. On the other hand, Desjardins’ posted five-year closed rate barely budged, a reflection of the fact that long-term bond rates changed much less during that period.


Desjardins, like most of the large Canadian financial institutions, tend to publish rates that are higher than what they will actually lend at, so it pays to shop around and negotiate. One mortgage broker, Invis, even publishes a chart of the major banks’ posted rates (http://www.invis.ca/rates/), along with comparative rates of what buyers will actually pay if they shop around.


Housing affordability stable, but could improve

The good news is that according to Anjou, housing affordability picture has improved slightly during the past few months. “On the (housing) price side the upward trend is clearly slowing, particularly in the central part of the country, however the direction of mortgage rates is more difficult to predict,” he wrote in a recent report. “We still believe that short and long-term rates will fall slightly in the first half of the year. However this rate cut will only materialize if the economy slows and inflationary fears subside in North America.”


Whether D’Anjou is right or not is an open question. However mortgage rate watchers will get good indication of which way the wind is blowing when the Bank of Canada’s publishes its next interest rate decision on March 6th, 2007.



Peter Diekmeyer (www.peterdiekmeyer.com) a freelance business and economics writer.





Recent Bank of Canada rate moves:


January 16, 2007, No change

December 5, 2006, No change

October 17, No change

Sept. 6, No change

July 11, 2006, No change

May 24, 2006, +1/4%, 4 ¼% 

April 25, 2006, +1/4%, 4.0%

March 7th, 2006, + 1/4%, 3 3/4%

January 24, 2006, + 1/4%, 3 1/2%

December 6, 2005 + 1/4%, 3 1/4%

October 18, 2005 + 1/4%, 3.0%

Sept. 7, 2005 + 1/4%, 2 3/4%

October 19, 2004 +1/4% 2 1/2%

September 8, 2004 +1/4% 2 1/4%
April 13, 2004 -1/4% 2%


The Bank of Canada’s rate announcement schedule:


March 6, 2007
April 24, 2007
May 29, 2007
July 10, 2007
September 5, 2007
October 16. 2007
December 4, 2007






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