How Increasing Interest Rates Affect Your Mortgage

On March 2nd, 2022, The Bank of Canada raised its key interest rate from 0.25% to 0.50%, the first since 2018, and more are expected to come this year. These rate increases impact every financial lending product, especially mortgages which are most people’s largest loan.

If you have been contemplating putting your condo up for sale, now may be an ideal time given the insights and information below, and as we enter the popular Spring selling market with buyers actively on the prowl.

If you’re locked into a fixed-rate for your mortgage, then your rate and payments won’t be affected at all for the duration of the term. If you have a variable-rate for your mortgage, then your rate and payments will be affected. It typically takes a week or more until the rate increase actually takes effect.

Interesting to note that approximately 75% of mortgages in 2020 were fixed-rate ones, but roughly 40% of all new mortgage loans issued in Q2 of 2021 were variable since rate increases were idle for three years and the discount between fixed and variable was substantial.

Outlining the Economics

If you plan on keeping your variable-rate mortgage, you need to understand that your rate will continue to increase throughout this year, and your payments will also go up. By just how much though? For every 0.25% increase in the key interest rate and for every $100K on your variable-rate mortgage, you can expect to pay about $12 more per month. So, if the amount owing on your current mortgage is $500K, then your new monthly increase will be about $60.

The good news for you and your variable-rate mortgage is that it will take several more increases before your rate is on par with an already existing fixed-rate mortgage. So, all along the way, you are saving on the amount of interest you pay and paying down more principal. Another positive piece of information about variable-rate mortgages is that they are easier and less costly to break compared to a fixed-rate one should you want to sell your condo or property before the term is up.

Upwards of 60% of mortgages are broken for a variety of reasons before the term date is reached, so it’s a fairly common occurrence in today’s real estate market. If a variable-rate mortgage is broken, the cost is typically three months of interest, whereas a fixed-rate mortgage can be several thousands of dollars or even tens of thousands depending on the amount borrowed. Switching from variable to fixed can also usually be done without penalty before the term ends using your same bank or lending institution.

When to Sell Your Condo Given the Rate Increases Are Projected to Keep Coming

There have been significant average sale price increases in the real estate markets across Ontario and Canada over the past few years and especially during the pandemic starting in the Spring of 2020. Low-interest rates, low inventory, and high demand for real estate have created favourable conditions for sellers.

Have you been thinking about selling your condo and are wondering what to do now given rate increases are here? Any time now may be a perfect time to sell since we do know that for every 1% or so of interest rate increases, the purchasing power of buyers is weakened. On average, a buyer’s purchasing power decreases by 10% for every 1% of interest rate increase, so if a buyer was counting on a budget of $600K but the key interest rate goes up by 1% in the meantime, then that same buyer may only be able to afford to spend $540K.

If you have been looking at an ideal condo sale price of $600K, just know that the buyer pool is, in theory, decreasing by a tiny bit every time a key interest rate increase occurs. This means that your final sale price could also be impacted and be lower than you had hoped for. If 2022 brings on more interest rate increases as projected, then you may want to speak to a real estate professional to determine when to list your condo and the sales strategy to deploy in order to maximize its value.

When to Buy a Condo With More Rate Increases Likely to Come

There’s never really a bad time to buy real estate as it tends to consistently increase in value over time - it’s one of the most stable investments you can make. To see why we believe the local condo market will remain strong, be sure to read this article as it looks at appreciation numbers, the area’s solid fundamentals, the benefits of building equity through real estate, and other dynamics.

If you have been on the fringe of buying a condo for a while now, then perhaps this first key interest rate in 2022 will light a fire to act sooner rather than later. With new listings starting to ramp up more now as we head into arguably the busiest time of the year for selling, more quality options may present themselves. Get your real estate agent and mortgage pre-approval in place, and you can be ready to pounce when attractive opportunities come along.

If you’re in no big hurry but are open to buying a condo, it leaves the door open to monitor the market and make offers when ready. Just be open and honest with your agent about your readiness, so he or she knows that you’re open to buying but don’t have a firm timeline in mind. If you’re concerned about the ongoing bidding wars, then be sure to take a look at pre-construction condos or assignment options where you can often find attractive opportunities to purchase below resale market rates and with less competition. We at Condo Culture have an incredible amount of experience dealing with these types of transactions and consistently have exclusive assignment inventory, so be sure to reach out if you want to see what’s out there and need some help navigating the process.

FAQs Regarding Real Estate and an Increasing Key Interest Rate

How many key interest rate increases are expected for 2022?

We don’t know for sure, but there’s some speculation from investors that we could see as many as five more incremental increases before the end of 2022, which could mean a 1.50% key interest rate increase in total for the year if each one is or averages 0.25%.

Sell, rent, buy?

If you decide to sell your condo soon to potentially maximize its price given the market dynamics happening above, should you then rent a place for a few months or a year and then buy when the seller’s market may soften? Timing a market is always challenging to do because there are lots of factors to consider and many are out of your control. Sure, the key interest rate is expected to rise throughout 2022, but the demand for housing across Kitchener - Waterloo, Cambridge, and Guelph will remain very strong this year and well into the future. Could the real estate market cool and be lower by 10% to 20% in the next six to twelve months? It’s possible, but it’s hard to speculate and nobody has a crystal ball to predict the future. Take a look at your savings and overall investment portfolio, map out your short and long-term housing plans, and as mentioned above, speak to a real estate pro to get educated insights.

Should I wait for mortgage interest rates to drop again ?

We have seen record-low mortgage interest rates over the past couple of years, so it was inevitable that they would increase again as almost everything in this world is cyclical. We should likely just assume that mortgage rates will be 3% to 5+% over the next few years, and could stay that way indefinitely. Talk to your mortgage broker about the current rates and what forecasts he or she is looking at months and years down the road, and determine how long of a term you’re comfortable with.

Should I lock in my variable-rate?

We touched on this a little bit already, but taking a variable-rate and locking it into a fixed one is fairly easy to do with your same bank or lender. If yours is currently sitting at 1.5% and the fixed-rate is around 3%, that means it will take roughly six more key interest rate increases at 0.25% each to get to that point, and you’re saving on interest and paying down your principal more in the meantime. You need to do what makes you sleep well at night and what’s best for your overall finances.

__How long are pre-approval mortgage rates good for? __

Whether you go to a bank or another lending institution for a mortgage, when you’re pre-approved, you will be given variable and fixed-interest rate options to consider. These rates are typically locked in for four months, so that buys you some time to make offers, buy and close on a new home. With the key interest rate increasing, you may be extra motivated to close during that four-month period to avoid a potential higher rate after. Never feel pressured to quickly buy real estate though, because finding the right fit is the most important part of the equation, and remember that a 0.25% increase means $12 or so more per month for every $100K borrowed.

Our team has a deep understanding of how all of the numbers shake out when it comes to selling, buying, leasing, or investing in condos. Tap into Condo Culture’s wealth of condo experience to achieve your exciting condo goals for 2022 - get in touch online or visit our Waterloo store at 191 King Street South underneath the Bauer Lofts to have a conversation with one of our friendly experts.