Low Interest Rates

The term on my mortgage is up for renewal in a couple of months. I have to decide between fixed or variable. The good news is that interest rates are lower today than when I bought my condo almost 4 years ago so no matter what I choose my monthly payments should become lower. My strategy is to try and prolong the life of my mortgage for as long as I can or until interest rates are much higher. I believe making extra payments to a mortgage in a low interest environment likely won’t be as financially beneficial as putting that extra money to work in a diverse investment portfolio instead.

13_03_ratesprices

Part of the reason why real estate prices are higher today than several years ago is because we had higher interest rates back then. When I bought my condo in 2009 a 5 year fixed rate was about 4%. But today the same mortgage can be found for 3%. Manulife even played around with a 2.89% 5 year fixed recently but decided to cut the promotion short. My current interest rate is 3.4%. If I can lower my rate to 3% when I renew then I would be saving around $70 a month. Enough to buy almost 30 ounces of silver a year 🙂 I just have to shop around for a good mortgage rate. Some people aren’t aware but banks and mortgage brokers aren’t the only places to find a lender for real estate. As mentioned earlier insurance firms like Manulife and Great West Life offer mortgage products to their clients too.  Home buyers can also go through a mutual bank service such as the Heritage Home Loan, or even a private mortgage broker who deals directly with investors looking to lend people money for interest income 🙂

How does interest rates affect home prices? When interest rates are low it doesn’t cost as much to borrow so people can afford to take on larger mortgages. This drives real estate prices higher because everyone can afford to take on more debt. When rates increase however, the opposite is true and house prices fall to match the demand of the buyers ability to finance them. For example Vancouver is well known for our million dollar bungalows (one story houses.) That’s because on a $800,000 mortgage amortized for 25 years at today’s low rate of just 3% the monthly mortgage payment is about $3,800. Seems kind of expensive, but I bet there are thousands of couples in the greater Vancouver area who can easily afford that. It’s basically $1,900 per person, so not ridiculously unaffordable yet. But if the mortgage rate was at 7%, like in the US before the housing bubble deflated, then the monthly payment would be $7000 a month on a $800,000 mortgage. Since there are less people in the market of paying $7000 a month on housing the market automatically adjusts and prices drop overall :0)

 

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My Financial Independence Journey

Nice description of how interest rates affect real estate prices.

agentfang
agentfang
03/22/2013 7:17 am

Fixed or variable for you? I’m still debating.

Alex Yang (@yyangalex)
Alex Yang (@yyangalex)
03/25/2013 8:49 pm

economy doesnt look particularly good right now either. i wouldnt be too surprised if 5 years later variable came out ahead, even with today’s low differential. that being said the premium being paid now for the peace of mind is among the lowest, so even if you come out behind, the price you pay for that is much lower than typical.

RetireInNiagara
03/22/2013 6:42 pm

Just got 5 year fixed at 2.89% this week