Mortgage Rates Over The Years – Rates and Dates: The Potential Effects of Mortgage Interest Rate Increases David Baxter and Andrew Ramlow Urban Futures Institute
Currently (June 2013) it may seem strange to discuss rising interest rates, given the prolonged decline in mortgage rates over the past three decades (Figure 1), the context of recent interest rate cuts in Europe, the US Fed’s pledge to keep rates at current levels until 2015, inflation in Canada above the Bank of Canada’s long-term target. is low and the Canadian dollar equivalent is rebounding. In contrast to the reality of the current situation, concerns about interest rate hikes are rightly noted; Finance Minister Jim Flaherty has said “interest rates will rise as people take on more liabilities than they can afford, as they inevitably will” and is concerned after the outgoing Bank of Canada’s Mark Carney continued to hold rates. Concerns about “record-high household debt,” stable for a long period since the 1950s, have led the Bank of Canada to maintain a bias toward higher borrowing costs in the “not-too-distant” future.
Mortgage Rates Over The Years
Since rate hikes are inevitable, there’s really no point in discussing “if” they will go up. However, what is debatable is “when” and “how much”. Unfortunately, those who talk of inevitable interest rate hikes offer little guidance on timing or magnitude. Little is said about timing or magnitude because they are largely unpredictable, since they are, after all, a matter of policy that is nominally related to inflation, but functionally related to unemployment, the level of inflation and economic growth. In this context, it appears Europe, the United States, China or Canada, by default, have little appetite for immediate rate hikes, and there is no indication when their appetite will return.
Why Do Banks Raise Rates When Bank Of Canada Doesn’t?
This means that when or how much rate hikes are discussed, consideration must be given to how much interest rate hikes borrowers can support over time. More specifically, since mortgages represent the most significant share of debt for many homeowners, it is interesting to consider how much mortgage rates can rise in the coming years without increasing borrowers’ current debt service burden.
I. Loan Service and Interest Rate Changes: The changing burden of mortgage loan service on the borrower is a function of three things: changes in interest rates, changes in the borrower’s income level, and the rate at which the mortgage loan is amortized. As shown above, although we cannot predict when interest rates will change, we can reasonably predict changes in other variables such as income and amortization. In doing so we can describe an interest rate envelope in which mortgage borrowers will not experience an increase in debt service burden relative to their income.
To make a rather dry mathematical exercise a little more palatable, the math will be presented in the example of a hypothetical average household in British Columbia. Data from Statistics Canada shows that the average weekly earnings of employed British Columbians in February of 2013 was $875.45[1]. Assuming two of these people in a household, the household income is $1,732.62 per week or $90,006.24 per year[2]. The same data source indicates that over the past 14 years, average weekly earnings have increased by 2.2 percent per year. Statistics Canada’s Labor Force Survey over the same period indicates that the average weekly wage rate increased by 2.4 per cent per year[3]. Assuming that income (decrease) will increase by an average of 2.2 per cent per year over the next few years provides an estimate of the future income stream that will be available to our average BC household to service the debt.
There are two forms in which interest rates are generally discussed. The first post is about the formal mortgage interest rates that the Bank of Canada publishes each week for conventional mortgages; In the last week of February 2013 these rates were 5.24 per cent for 5-year tenure, 3.65 for 3-year tenure and 3.00 for one-year tenure[4].
Year Mortgage Rates Dip Even Further Below 20 Year Rates
The second rate is what borrowers actually pay, because during periods of falling rates borrowers are offered discounted rates below the posted rate, knocking down the 1.75 percent five-year mortgage rate (one-third off). As interest rates rise, discounts decrease, then disappear, and posted rates prevail. In this paper, the baseline measurement will be based on posted rates because there is a published source for these numbers. That said, with this baseline in mind, results using discount rates are also considered.
The relationship between income, interest rates and loan service is called underwriting or borrower qualification. In this process, a set of criteria is applied to determine how large a loan a borrower can obtain at current interest rates. The standard provisions considered here a) borrowers can spend a maximum of 27 percent[5] of their monthly income on mortgage payments and b) the grace period is 25 years. In practice these parameters will certainly vary, but they provide a good basis for discussion.
Example A) A conventional first mortgage with a five-year term at a posted rate (Table 1). Under conditions prevailing in February of this year, subject to a 27 percent debt service ratio and a 25-year amortization period, the average household with an income of $90,006.24 per year could borrow $344,096.61 at 5.24 percent. A fixed term mortgage will last for the next five years. At the end of January 2018, the family’s debt outstanding will be $305,687.76, the family has reduced their debt by $38,408.85. Over five years, based on a long-term average gain of 2.2 percent per year, their household income would have increased to $101,512.42. As they face negotiating new mortgages due early in 2018, the question is: What is the maximum interest rate our average family can afford so that the income ratio does not exceed 27 percent of debt service? Assuming the same underwriting terms (ie, 25-year amortization) the answer is (after all the tedious math) they could pay a 7.75 percent rate, 2.5 percentage points, or 48 percent, higher than their current rate. The reason for their ability to pay higher rates is twofold: their income has increased by 11.5 percent and they have reduced their debt by 11.2 percent.
Example B) A one-year term conventional first mortgage at a posted rate (Table 1). The same income and underwriting standards in Example A would have supported a one-year mortgage rate of $432,873.21 in February 2013 at 3.00 percent. Each year the family will pay down a little bit of principle, which will reduce their debt a little and increase their income, which will help them in the annual renegotiation of a new mortgage to pay off their arrears. As shown above, the result will be that as the household progresses over the next few years, they will be able to justify higher interest rates and remain within the 27 percent debt service limit. By the end of January 2018, when this family negotiates their 5th financing, they will be able to support a one-year mortgage rate of 5.26 percent, 2.26 percentage points, or 75 percent, higher than the prevailing rate. Today
Compare Desjardins Mortgage Rates In Canada
Example C) A first mortgage with a five-year term at a discounted rate (Table 1). Given the widespread practice of forgiving mortgage loans, it’s informative to consider how this might position families moving forward. Using a one-third discount on the 5-year posted rate of 5.24 percent, the estimated initial discount rate would be 3.49 percent, giving our average household a borrowing capacity of $410,598.71 in February of this year. At this rate, in five years’ time they will have an outstanding balance of $354,221.25, reducing their mortgage debt by $56,377.46. Given their high yields (again 2.2 percent annual growth), they can refinance at 6.08 percent without exceeding a 27 percent debt service ratio. This rate is 2.6 percentage points (74 percent) higher than their initial rate of 3.49 percent. Note that the relative rate increase on this discounted option is greater than the 5-year posted option, the result of increased loan amortization that would occur at a lower rate over the same amortization period.
Example D) First mortgage with one year term at discount rate (Table 1). The lowest rate to consider here is 2.0 percent, the result of a one-third discount to the posted one-year rate of 3.0 percent. At this rate, our average household would have supported $483,775.44 in debt in February of this year. By February of 2018, after five years of negotiations over new terms and income increases, the
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