Mortgage Interest Rates Over The Last 10 Years – Fees and Dates: The Implications of Extended Mortgages David Baxter & Andrew Ramlo The Urban Futures Institute
It may seem odd to discuss the current (June 2013) interest rate hike, given the past three decades of mortgage declines (Figure 1), the trend of the latest interest rate cuts in Europe, the US Fed’s. promises to hold rates at current levels until sometime in 2015, Canadian inflation is below the Bank of Canada’s long-term target, and the Canadian dollar is hovering around par . Contrasting with the reality of the current situation, concerns about rising interest rates are well-founded; Finance Minister Jim Flaherty said he was concerned about “people taking on more debt than they can afford as interest rates rise, as they rise” and, as the Bank of Canada’s Mark Carney continues to hold rates. For the longest time since the 1950s, the fear of “higher housing debt” has led the Bank of Canada to keep its eye on raising rates in the future.
Mortgage Interest Rates Over The Last 10 Years
Since they cannot be increased, there is no reason to discuss “if” they will increase. What is negotiable is “when” and “how much”. Unfortunately, there isn’t much guidance from people talking about rising interest rates based on their timing or amount. The least reason that is said about the timing or amount is that it is not known, because it is related to the policy related to inflation, but related to unemployment, income levels and economic growth. In this regard, whether in Europe, the United States, China, or in Canada, it seems that there is no desire for an immediate increase, nor does it indicate when the hunger will come for these things. .
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This means that the discussion of the increase in consumption should turn from the time or the amount, considering the amount of increase in the interest rate that borrowers can afford over time. What’s more, since mortgages are the largest share of total homeowner debt, it’s interesting to think how much mortgage rates could increase in the coming years with increasing the current debt burden.
Loan servicing and interest rate changes: The changing burden of servicing a mortgage on a borrower over time is a function of three factors: changes in interest rates, changes in the borrower’s income level and the amount of the mortgage loan that is increased (amortized). ). As mentioned above, although we cannot predict when interest rates will change, we can effectively plan for changes in other factors, including income and including amortization. By doing so we can define an interest rate envelope within which mortgage borrowers will not see an increase in debt service burdens relative to their income.
For a better dry math exercise, let’s apply the math to an example of a hypothetical average home in British Columbia. Statistics Canada data shows that the average weekly income of a working British Columbian in February of 2013 was $875.45[1]. Two of these people in the household are expected to contribute to a household income of $1,732.62 per week, or $90,006.24 per year[2]. The same data source shows that over the past 14 years, weekly earnings have increased 2.2 percent annually. At the same time Statistics Canada’s Labor Force Survey shows that average weekly wages have increased by 2.4 percent annually[3]. Assuming that income will increase at an average (low) of 2.2 per cent per year can estimate the future income stream that our average BC household will have to service its debt.
Interest rates are generally discussed in two ways. The first is in the context of the mortgage interest rate published by the Bank of Canada each week for conventional mortgages; for the last week of February 2013 it was 5.24 percent for a 5 year mortgage, 3.65 for a 3 year, and 3.00 for a one year[4].
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The second is the rates that borrowers actually pay, although when the loan defaults, discount rates are often offered below the posted rate, with as much as 1.75 percent in knocked off five-year mortgage payments (a third discount). As interest rates rise, rates decrease, then disappear, and fixed rates prevail. In this paper, the base measurement will be based on the posted costs because there is a published source for these numbers. That said, considering this baseline, consideration is given to the effect using discount rates.
The relationship between the proceeds, the interest rate, and the loan service is called underwriting or the loan agreement. In this process, a standard method is used to determine how much credit a borrower can afford given the current interest rate. The general assumptions made here are that a) borrowers can spend up to 27 percent[5] of their monthly income on mortgage payments and b) the loan term is 25 years . Of course there will be differences in these parameters in practice, but they provide a good basis for the discussion at hand.
Example A) A typical mortgage is five years at the posted rate (Table 1). Under the conditions that prevailed in February of this year, the average family with its $90,006.24 per year can get 27 percent of the debt service and the 25-year amortization period can borrow $344 , 096.61 at 5.24 percent, a fee. will prevail for the next five years during the term of the mortgage. At the end of January 2018, this family’s outstanding loan balance was $305,687.76, with the family reducing their debt by $38,408.85. In five years, due to the average income of 2.2 percent of the year, the income of their family increased to $101, 512.42. As they face negotiating a new mortgage for the outstanding balance at the beginning of 2018, the question is: What is the highest interest rate that our average family can afford in order not to exceed of 27% debt service to cash ratio? Assuming the same underwriting terms (ie, a 25-year amortization) the answer (after a little math) is that they can pay up to 7.75 percent, 2.5 percent, or 48 percent, higher than their current salary. The reason for their ability to pay higher wages is twofold: their income increased by 11.5 percent and they reduced their debt by 11.2 percent.
Example B) A one-year conventional mortgage at the posted rate (Table 1). The same income and underwriting conditions in Example A supported a $432,873.21 mortgage at a one-year rate of 3.00 percent in February of 2013. Each year the family pays a larger principal, then reduce their debt, and see their income increase, helping them negotiate a new mortgage to pay off their balance. As mentioned above, the result is that the family is moving forward in the coming years, they can support the higher interest rate and stay within the debt service limit. 27 percent. By the end of January 2018, when this family is negotiating their 5threfinancing, they can support a one-year mortgage payment in the range of 5.26 percent, 2.26 percent, or 75 percent, whichever is higher. higher than the winning rate. today.
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Example C) The first mortgage is five years at a discount (Article 1). As mortgage foreclosures become more common, it’s important to consider how to put families first. Using a one-third discount rate at a 5-year fixed rate of 5.24 percent, the estimated down payment is 3.49 percent, which would give our average family a potential loan of $410, 598.71 in February this year. With this amount, in five years, they will have a balance of $354,221.25, reducing their mortgage debt by $56,377.46. Given their high income (growing 2.2 percent a year), they can return money at a rate of up to 6.08 percent without a maximum of 27 percent in debt service . This percentage is 2.6 percent (74 percent) higher than their previous figure of 3.49 percent. Note that the interest rate increases in this discount option are higher than in the 5-year option, resulting in increased debt that comes with a lower interest rate. over the same amortization period.
Example D) One year first mortgage at a discount (Table 1). The minimum interest to be considered here is 2.0 percent, the result of which is a reduction of 3.0 percent placed a year in thirds. At this rate, our average family can support a loan of $483, 775.44 in February of this year. In February of 2018, after five years of negotiating new terms and revenue growth, the
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