Market View

In this three-part series we will look at why NOW is a great time buy a new home in Edmonton. This article shows how rising interest rates make NOW a great time to buy.

PART 1: RISING INTEREST RATES

Rising interest rates should concern anyone looking to take that step into home ownership. Often a hidden cost in the purchase of a home, interest rates can have a huge impact on affordability and monthly budgeting. Rising interest rates are what many economists see in store for 2017/18. NOW is a great time to buy because you have an opportunity to lock in savings.

The Bank of Canada raised interest rates for the second time in 2 months today. There are two more interest rate announcement dates on the Bank of Canada’s schedule – October 25th and December 6th. Most forecasters were expecting a 25 basis point increase in October, so today’s announcement has surprised forecasters. The Bank cites “recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly based and self-sustaining”.

When the Bank of Canada will feel confident enough to rise rates again – no one knows. In a rising interest rate environment, the sure bet is to lock in a rate now to SAVE.

Let’s see at what this would look like to the average home purchaser in Edmonton. According to the Edmonton Real Estate Board the Average Selling Price for All Residential in July 2017 was $383,624. A buyer with the minimum 5% down payment ($19,182) would need a mortgage of $364,442. With today’s rates at 2.99% on a 25 year mortgage, this would mean a monthly payment of $1,723.

Let’s look at what happens to payments and interest as rate go up on that same home:

RATE MONTHLY PAYMENT INTEREST TERM INTEREST AMORTIZATION
2.99% $1,723 $50,370 $152,386
3.24% $1,770 $54,676 $166,501
3.49% $1,818 $58,994 $180,816
3.74% $1,866 $63,323 $195,330
3.99% $1,915 $67,662 $210,038

As you can see, interest rate increases can be very costly over the term of amortization. They are costly because of compound interest. From the example above, we can see that a 1% rate increase would mean over $50,000 in additional payments for the same house over a typical 25-year term. Even in the short-term, locking in a 25 basis point savings on your rate would save over $4,000 over the initial term.

NOW is a great time to buy because it appears that rates will be going up and there is an opportunity to lock in savings. In our next article in this series we will look at how an improving economy makes NOW a great time to buy!

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