April 26 2021
The Impact of Lower Interest Rates on Purchasing a Home
What does having a lower interest rate mean for homebuyers?
If you have watched the news or have discussed the real estate market in the past year, it’s likely that you would have heard the buzz around Canada’s historically low-interest rates.
Canada’s 5-year fixed rate reached a record low in March 2020 at 0.25%. This dramatic decrease in interest rate was part of the Bank of Canada’s efforts to support the economy during the pandemic:
- Decrease in cost to borrow money = an increase in incentive to borrow money
- Increase in borrowed money to spend = an increase in money back in the economy, stimulating the overall economy
Since January 2020, interest rates have stayed at 0.25% until recently it climbed by 25 basis points to 1.64%, but the Bank of Canada has pledged to keep its benchmark interest rate low until the economy recovers.
Another thing to take into consideration is the upcoming changes to Canada’s stress test. Just last week, the Bank of Canada announced that they will be making changes to minimum qualifying rate for uninsured mortgages. You can learn more about what that means for you here.
Now you may be asking yourself, “what does having a low interest rate mean for me?”. Continue reading to find out how interest rates can help you save money in the long term when purchasing a home and why you should consider buying a home before interest rates rise.
*Please note that we are not licensed mortgage professionals and we suggest that you speak to a mortgage broker to learn more about what is the best option for you.
Lower interest rates mean lower monthly payments:
For example: you buy a house for $400,000 with 4% interest rate with 20% down ($80,000) – your monthly payments for a 30-year term mortgage will be $1,520. Or, if you purchased the same house, with all of the same variables as above, but at a 2% interest rate, your monthly payment would be $1,180. Saving you $340 per month.
Lower monthly payments means you can qualify for a bigger home budget:
In the example above, if you were only able to afford a $1,520 monthly payment, you’d only be able to qualify for a mortgage of $320,000 at 4%. Alternatively, at a 2% interest rate you could afford a home with a mortgage of $400,000 with approx. the same monthly payments (given that you have extra money available for a larger down payment that would be needed).
*Keep in mind that using this extra savings for your down payment might affect your ability to make your monthly payments at $1,520.
Lower interest rates mean less interest paid:
In the first example above, in a 5 year period, you’d end up paying over $30,000 more in interest at 4% compared to the 2% rate. See chart below for a further breakdown:
|5 Year Term||4% Fixed Mortgage Rate||2% Fixed Mortgage Rate|
|– Interest Paid||$60,600||$29,900|
|Balance at End||$289,300||$279,000|
Though lower interest rates can save you money, you must take into consideration that lower interest rates means a higher demand amongst buyers. This higher demand may lead to an increase in housing price. You must research historic pricing for the area and home type you are wanting to purchase to weigh both the pros and cons of having a low interest rate.
Buying a house is a very important decision and mortgage rates are just one element that you must consider. We suggest speaking with a mortgage broker and a real estate professional to figure out what is the best option for you.
McConachie still has lots that are available! Don’t miss out on this opportunity to be a part of this connected community. Learn more about life in McConachie here.
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