Mortgage rates are rising. Will buyers choose to wait?

By Lindsay Smith/Real Estate Columnist

Common sense should inform we super bright people that when the mortgage rates increase, as they have in the past week, paying more for a mortgage should (should is one of my least favourite words by the way) slow down sales. Let’s dig into this thought and see if there is any substance to it.

People currently are choosing two options on a regular basis when it comes to mortgages – five-year fixed mortgages and variable rate mortgages. The reasons the majority of borrowers choose between these two products are, for the five-year fixed term loan, they have  the security that their payments will not change during the term, and with the variable rate mortgage, the borrowers are getting the absolute lowest rate they can, assuming some risk that the rates may rise.

The rates for fixed mortgages have increased about a quarter of a percentage in the past week. This is how the rate will affect the “average” mortgage locally.

Average detached home price in Oshawa – $856,000. Assume a buyer has a 20 per cent down-payment, the mortgage would be $685,000. Based on the current five-year fixed rate the payment would be $2,914 per month. Prior to the quarter point increase the same mortgage would have been $2,835/month. That means an increase of $70 per month or just under $5,000 over five years. This is not “chump change;” however it most likely it is not a large enough increase to knock some buyers out of the market. Psychologically it may have a reverse effect.

Most buyers who are looking for a home get pre-approved for a mortgage. What this does, along with determining what the lender will lend to the buyer, is it locks in a guaranteed mortgage rate for a specific period of time. Most lenders commit a rate to a buyer for 90 days. This means the buyer has to purchase a property and have the move in date happen within three months. When rates rise, buyers with lower rate guarantees tend to speed up the process to buy and capture the lower rate. In the short term, small rate increases do the opposite of what we think they will do – they increase activity.

With buyers looking to make a purchase they give weight to many factors, not just the mortgage rates that they end up paying. A good example, that is much more compelling than worrying about a $70 per month increase, is to track how quickly the home prices have been jumping over the past few months. Oshawa, Clarington and Whitby have seen skyrocketing price increases since Jan. 1. On average, detaches homes have increased by $133,000 since the beginning of the year. What we are seeing are buyers desperate to purchase homes before the values become out of reach. This is much more of a driving factor than rates increasing.

I did some research and found a TD Canadian Housing Forecast for 2020/2021/2022. The data and predictions shared insight into the fact that Ontario had a 15 per cent increase in home values in 2020 and their forecast was that in 2021 we would have a further 20.3 per cent increase. This is one of the factors that overshadows rates increasing. Truly, a buyer cannot out-save the market.

Based on TD forecasting, the average home price in Oshawa for a detached home will be $871,000. Currently we are at $856,000 just over two months into the year. One thing is for certain, buyers are frantically snapping up homes fearing that the values may continue rising. Will we see the average home in Oshawa upwards of $1,000,000 by the end of the year? Stay tuned.

For more information on the above discussion, or if you see a real estate emergency on the horizon, I can be reached at lindsay@buyselllove.ca.