Interest Rate Hike Means Canadians

Will Have To Think Smaller

Can you afford to buy a home? Have you ever considered the impact higher rates will have on your home buying options? That nice house that you saw and qualify for today may be out of reach when we see higher interest rates.

New Home Buyer Scenario

Consider this typical new home buyer scenario before the stress test introduced by the federal government last October. Suppose gross family income is $87,000, with household debt payments totaling $1,000 (credit cards, car payments etc.). If this person could put five percent toward a down payment, the bank would qualify them for a $450,000 mortgage, which incidentally represents the average price of a single-family home in Calgary.

After New Lending Rules

After October 17, 2016, when the new lending rules came into effect, and assuming there have been no other changes to this person’s financial situation the bank would only qualify them for a $360,000 mortgage. That represents a 20 percent drop in their purchasing power.

From one day to the next, this new home buyer went from being able to purchase a nice single family home with three bedrooms, two and half baths, and a double garage, to only being able to purchase half of a duplex.

What Happens When Interest Rates Go Up?

The simple answer is that your purchasing power goes down. In fact, you lose 11% of your purchasing power for every 1% of rate increase. Which means that if interest rates increase to 5%, which is where the federal government anticipates the interest rates will be five years from now, you will lose 27.5% of your purchasing power. That means that if we take the current average home price of $450,000 you will only be able to qualify for $326,250.

Can You Afford To Buy A Home?

Can you afford to buy a home? If you have questions about current Interest Rates or the new lending rules, contact Nathan or Steve at Client First Mortgage Solutions today.

Read More… – Huffington Post