Agent Will

If you’re are now the envious holder of a variable rate mortgage that was granted to you recently at something like prime minus x% (best I saw was Prime-0.90%) then you are just swimming in joy as you saw your mortgage payments drop today as the BOC cut prime to 4.25%.  Further rate cuts may be coming as well as governments worldwide look to grease the credit wheel.

If, on the other hand, you are just looking to buy and were thinking variable was going to be the sweet deal it has been then I have some sad news for you.  Banks, in their efforts to stem losses from all over the place, have ceased offering discounted prime rates and are now going from prime to prime PLUS 1% (TDCanadatrust, one of the biggest lenders in the country is posting 5.75% which I guess will drop to 5.25% though the newspaper article linked below indicates banks may be defining their own Prime - explain me that one!).  So your friend who bought last month may have an effective rate of 3.35% while you will now be looking at 5.25%.  Just how big of a difference is that?

Well, for every $100,000 borrowed (25 year amort calculated monthly) your friend will pay $492 ($15,636 in interest over 5 years at 3.35%) while you on the new rate will be paying  $599 ($24,884 in interest over 5 years at 5.25%).  Should rates fluctuate the monthly payments and interest paid will change but I think those numbers just illustrated quite well what has just happened over the past couple of days.

But just to be clearer:

Last month you needed $1537/month in income for every $100,000 to borrow.  Today you need $1872/month (on a gross debt service ratio of 32%).  So if your income has not gone up nearly 20% and you and your buddy have the same incomes then what we are really talking about is that you now qualify for $82,561.  That’s an 17.5% haircut in purchasing power.

Now… where do you think home prices are going to go?

Aha!  But before you think this is another gloomy post here on AgentWill I do have good news for sellers who are not buying again (ie selling investment properties, selling second homes, moving out of the country, or just not looking to take their mortgage with them).  You have incredible power in a market like this if your mortgage is transferable.  Imagine two homes, side by side, apples to apples, and priced nearly the same.  One has a transferable mortgage with locked in rates below current rates or is variable at prime minus X%.  The other does not.  Effectively what you have is one home that will be much cheaper to finance monthly and cost less over the term in interest than the other.  Now, guess which one is going to sell first and which one is going to sell for more.  Right.  The one with the transferable mortgage!   Who would have thought locked in debt could be so valuable?  (OK, those who lived and sold in other down markets with rising rates, you knew).

Even more info on Banks not able to cut rates can be found here:  Globe and Mail